Author Question: The table below gives the historic return over the past five months for the market portfolio and two ... (Read 64 times)

big1devin · **on:** Jul 10, 2018

The table below gives the historic return over the past five months for the market portfolio and two assets: A and B.

Which of the answers below best describes the historic beta for A and B?

Month Market Asset A Asset B
1 3 5 4
2 -5 -6 4
3 1 4 4
4 -10 -12 4
5 6 10 4

A) A < 0; B = 0
B) A > 0; B = +1
C) A > 0; B = 0
D) A > +1; B = 0
E) A < -1; B = +1

Question 2

Balon Plastics, Inc. is trying to decide how best to finance a proposed 10,000,000 capital investment. Under
Plan I, the project will be financed entirely with long-term 9 percent bonds.

The firm currently has no debt or
preferred stock. Under Plan II, common stock will be sold to net the firm 20 a share; presently, 1,000,000 shares
are outstanding. The corporate tax rate for Balon is 40 percent.
a. Calculate the indifference level of EBIT associated with the two financing plans.
b. Prepare an EBIT-EPS analysis chart, showing the intersection of the two financing plan lines.
c. Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT?
Why?
d. If EBIT is expected to be 3.1 million, which plan will result in a higher EPS?

ttt030911 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

D

Answer to Question 2

a. (EBIT)(1 - 0.4)/1,500,000 = (EBIT - 900,000)(1 - 0.4)/1,000,000
EBIT = 2,700,000
b. GRAPH SHOULD BE DRAWN BY STUDENT
c. The bond plan will magnify changes in EPS since it increases financial leverage.
d. Since 3.1 million EBIT is above the indifference point of 2.7 million, the bond plan will give a higher EPS.