OM FINAL

FIN 351 SAMPLE MIDTERM 2

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WA CC and Measures oJ Leverage

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1. Suppose the Widget Company has a capital structure composed of the following, in billions: Debt $40, Common equity $50, Preferred stock $10. The debt rating is of AA. The yield on AA debt is 8%. The marginal tax rate is 30%. The preferred annual dividend is $10, current stock price is $100. If the risk-free rate is 3%, the expected market risk premium is 5%, and the company’s stock beta is 1 .25. What is Widget’s weighted average cost of capital?

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2. Calculate DOL, DFL, DTL and QBE, QOBE of a company: Number of units produced and sold: 1,000 Sales price per unit: 300 Variable cost per unit: 1 50 fixed operating cost: 50,000 Fixed financing expense: 10,000

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