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[answered] Below is Income Statement information for Mill Creek Corp.


Below is Income Statement information for Mill Creek Corp.

Revenue: $3,107,262

Variable costs: 30% of revenue

Fixed costs: $1,000,000

Depreciation: $475,000

Bond Issue A: $300,000 face value, 10% coupon

Bond Issue B: $500,000 face value, 8% coupon

Bond Issue C: $900,000 face value, 12% coupon

Tax rate: 40%

Common shares issued and Outstanding: 250,000

Calculate the degree of operating leverage for the firm.?(2 marks)

Calculate the degree of financial leverage for the firm.?(2 marks)

Calculate the degree of combined leverage for the firm.?(2 marks)

If the company is able to increase their sales by 15%, what percentage increase in EPS would you expect to observe??(2 marks)

If the sales increase by 15%, what will the new EPS be??(2 marks)

Problem 3?(6 Marks)

Vanier Corporation is an unlevered firm. The current market value of its equity is $17.5 million.

a. If there are no taxes and the EBIT is $2,012,500, what is the cost of equity? What is the WACC??(3 Marks)

b. If the tax rate is 35%, what is the EBIT if the unlevered cost of equity is 11.5%? What is the WACC??(3?Marks)

(Assume there is no cost of financial distress and general M&M assumptions apply)


 


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