Question 14

Comparing two production methods, we should choose the one with higher variable costs if:

A. The expected EBIT is lower than the Sales-EBIT breakeven.

B. The expected revenue is lower than the Sales-EBIT breakeven.

C. The expected revenue is higher than the Sales-EBIT breakeven.

D. The expected EBIT is higher than the Sales-EBIT breakeven.

Question 15

DIY is considering buying a company that has no debt and asset beta of 0.76. The market risk

premium is 0.068 and the risk-free rate is 0.020. DIY plans to use 77% debt and its cost of debt

is 0.046. If the corporate tax rate is 0.34, what is DIYs required rate of return of the

acquisition?

Question 16

A firm with cyclical earnings is characterized by:

A. High fixed costs.

B. High levels of debt in their capital structures.

C. Revenue patterns that vary with the business cycle.

D. Low contribution margins.

Question 17

DIY has 214,893 shares of common stock outstanding at a market price of $38.2 a share. DIY

just paid an annual dividend $1.54 per share. The dividend growth rate is 0.049. DIY also had

6,434 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 0.090 coupon,

pay interest annually, and mature in 7 years. The bonds are selling at a yield of 0.065. The

companys tax rate is 0.30. What is DIYs weighted average cost of capital?

Question 18

To set the capital structure of the firm, managers should select a structure such that:

A. The firms value is maximized.

B. The firms value is minimized.

C. The bondholders value is maximized.

D. The bondholders value is minimized.

Question 19

The current stock price is $800. It may increase by 20% or decrease by $266 in 1 month. The

risk-free interest rate is 0.047% per month. If the exercise price is $754, what is the put

premium?