OM FINAL

FIN 351 SAMPLE MIDTERM 2

WACC and Measures of 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?

2. Calculate DOL, DFL, DTL and Q_BE, Q_OBE of a company: Number of units produced and sold: 1,000 Sales price per unit: 300 Variable cost per unit: 150 Fixed operating cost: 50,000 Fixed financing expense: 10,000

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