14-3: Determining the Optimal Capital Structure

Problem 14-4 Unlevered beta

1. Harley Motors has $12 million in assets, which were financed with $7.2 million of debt and $4.8 million in equity. Harley's beta is currently 1.15 and its tax rate is 40%. Use the Hamada equation to find Harley's unlevered beta, bU. Round your answer to two decimal places. ---------------------

14-2: Business and Financial Risk

Problem 14-5 Financial leverage effects

Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $12 million in invested capital, has $3 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 13% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure.

A. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL is ------- % ROIC for firm HL is ------%

B. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL is ------- % ROE for firm HL is ------- %

C. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 20% to 60%, even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places. ----------%

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14-2: Business and Financial Risk

Problem 14-6 Break-even analysis

The Weaver Watch Company sells watches for $23, the fixed costs are $140,000, and variable costs are $13 per watch.

A. What is the firm's gain or loss at sales of 9,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent. $ --------- B. What is the firm's gain or loss at sales of 16,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent. $ ---------

C. What is the break-even point? Round your answer to the nearest whole. ---------- units

D. What would happen to the break-even point if the selling price was raised to $34 but variable costs rose to $25 a unit? Round your answer to the nearest whole. ---------units