Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Universal Exports Inc. is a small company and is considering a project that will require $650,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $140,000? 16.15%   12.11%   11.30%   13.73%     Determine what the project’s ROE will be if its EBIT is –$40,000. When calculating the tax effects, assume that Universal Exports Inc. as a whole will have a large, positive income this year. -5.06%   -4.37%   -4.6%   -4.14%     Universal Exports Inc. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company’s debt will be 13%. What will be the project’s ROE if it produces an EBIT of $140,000? 18.05%   22.56%   25.94%   19.18%     What will be the project’s ROE if it produces an EBIT of –$40,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Universal Exports Inc. as a whole will have a large, positive income this year. -22.78%   -20.88%   -18.98%   -19.93%     The use of financial leverage    the expected ROE,    the probability of a large loss, and consequently    the risk borne by stockholders. The greater the firm’s chance of bankruptcy, the    its optimal debt ratio will be.    manager is more likely to use debt in an effort to boost profits.

Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 14%. Milton also has outstanding debt of $25.57 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ million. (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $ million. (Round to two decimal places.)

Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 14 percent return but would cost 16 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Weighted average cost of capital b. Which project(s) should be accepted? O New machine. O Piece of equipment. %

Suppose your company needs $17 million to build a new assembly line. Your target debt- equity ratio is .75. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,5667.) a. Flotation cost b. Amount raised %

A project will cost $30 in year 1 and generate earnings before interest, taxes and depreciation of $20 in year 1, $15 in year 2 and $10 in year 3. The inital cost is to be linearly depreciated over three years.   The company has a marginal corporate income tax rate of 21% and the appropriate unlevered cost of capital for the project is 12%.   a: What is the NPV of the project if the firm is all equity-financed?   b: What is the APV of the project if the firm uses $30 debt finance in the first year at an expected rate of return of 5%? The company will pay interest in years 2 and 3 and pay off the loan in year 3

Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 25%. What will Globex Corp.'s beta be if it decides to make this change in its capital structure? Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curre is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk 1.65 1.58 1.80 1.50 e-tax cost of debt is 6%, and its tax rate m on the market is 7.5%. US Robotics

Universal Exports Inc. is a small company and is considering a project that will require $650,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $155,000?   10.73%   17.88%   18.77%   12.52%     Determine what the project’s ROE will be if its EBIT is –$50,000. When calculating the tax effects, assume that Universal Exports Inc. as a whole will have a large, positive income this year.   -4.64%   -6.67%   -5.22%   -5.8%     Universal Exports Inc. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company’s debt will be 12%. What will be the project’s ROE if it produces an EBIT of $155,000?   28.11%   18.74%   26.77%   21.42%     What will be the project’s ROE if it produces an EBIT of –$50,000 and it…