Answer:
Appropriate Rate = 8.85%
Explanation:
Given the following :
Paste Inc,
cost of debt (Kd) = 6% = 0.06
Cost of Equity Ke = 12% = 0.12
Weight of debt ; Wd = 40%
Weight of equity; We = 1 - 40% = 0.6
Pretax discount :
We * Ke + Wd * Kd
0.6 * 0.12 + 0.4 * 0.06 = 0.096
For orange :
Weight of debt (Wd) = 50% = 0.5
Weight of Equity (We) = 50% = 0.5
Cost of debt (Kd) = 6% = 0.06
Tax rate (r) = 25% = 0.25
Cost of Equity (Ke) :
Pretax discount + 1(pretax discount - cost of debt)
0.096 + 1(0.096 - 0.06)
0.096 + 0.096 - 0.06 = 0.132
WACC: for orange Inc.
We * Ke + Wd * Kd * ( 1 - tax rate)
0.5 * 0.132 + 0.5 * 0.06 * (1 - 0.25)
0.5 * 0.132 + 0.5 * 0.06 * 0.75
0.066 + 0.0225
= 0.0885
= 0.0885 * 100%
= 8.85%
They know that if you do not go through with the contract it may lead you to whats known as fraud. It is illegal to not go through with a contract so you may be arrested
Answer:
b. have the same level of risk as the firm's current operations.
Explanation:
According to the M&M's model of capital structure, two entities operating in the same type of business with similar business risks (e.g proportion of variable costs to fixed costs, operating profits) have the same total value irrespective of their capital structures. This means that in order for WACC to be relevant for discounting purposes of a new project it's important that the new project and the firm's risks are same (at least the business risks).
Secondly, having same level of risk also means that the project will have a similar operating income generated by it's assets, hence when the return of two projects is similar the cost of finance/business will also be similar therefore the new project must share same level of risk in order for WACC to be used as a discount rate.
Answer:
31
Explanation:
The calculation of indifferent between your current mode of operation and the new option is shown below:-
Current Operation
Contribution Margin = Monthly Fees - Variable Cost
= $734.00 - $91.00
= $643.00
Total Fixed Cost = Rent and Utilities + Salaries + Insurance
= $5,435.00 + $6,171.00 + $1,545.00
= $13,151.00
New Operation
Contribution Margin = Monthly Fees - Variable Cost
= $1,054.00 - $158.00
= $896.00
Total Fixed Cost = Rent and Utilities + Salaries + Insurance
= $11,679.00 + $6,974.00 + $2,408.00
= $21,061.00
Here we will assume the indifferent number of students will be X
So,
Income under current option = Income under new option
$643.00 × X - $13,151.00 = $896.00 × X - $21,061.00
$253X = $7,910
X = $7,910 ÷ $253
= 31.26
or
= 31
Answer:
The slope of the CML = (13% - 7%)/25% = 0.24
Explanation:
Given that:
expected rate of return of 17%
standard deviation of 27%.
The T-bill rate is 7%.
You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 13% with a standard deviation of 25%.
The slope of the CML is
Slope of the CML = (Expected return of Market - Risk free return)/Standard deviation of market
The slope of the CML = (13% - 7%)/25% = 0.24
= (0.13 - 0.07) /0.25
= 0.24
