Author Question: If debt financing is used, which of the following is correct? (Read 397 times)

ninaj · **on:** Aug 7, 2023

Question 1

Given that its debt is $600,000, its leverage value is $679,800, a tax rate of 33%, a cost of debt (unleveraged) of 17%, and a cost of debt of 13%, what is this firm’s cost of equity?

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35.33%

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36.49%

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37.15%

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38.20%

Question 2

If debt financing is used, which of the following is correct?

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The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.

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The percentage change in net operating income will be greater than a given percentage change in net income.

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The percentage change in net operating income will be less than the percentage change in net income.

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The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.

labrinker · **Reply #1 on:** Aug 7, 2023

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