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# The cost associated with each additional dollar of financing

### Resolved Question:

The cost associated with each additional dollar of financing for investment projects is

A. the incremental return
B. the marginal cost of capital
C. risk-free rate
D. beta

22) The XYZ Company is planning a \$50 million expansion. The expansion is to be financed by selling \$20 million in new debt and \$30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?

A. 14.0%
B. 9.0%
C. 10.6%
D. 11.5%

23) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?

A. 18.0%
B. 13.0%
C. 10.0%
D. 14.2%

24) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers’ present EBIT is \$3 million, and profits available to common shareholders are \$1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to \$1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?

A. \$1.75
B. \$2.00
C. \$3.25
D. \$4.50

25) Zybeck Corp. projects operating income of \$4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of \$10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of \$6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will be the projected EPS next year?

A. \$4.94
B. \$2.96
C. \$5.33
D. \$3.20
Submitted: 4 years ago.
Category: Business and Finance Homework
Expert:  Neo replied 4 years ago.
Good day!

21. A. the incremental return
22. C. 10.6%
23. B. 13.0%
24. A. \$1.75
25. B. \$2.96

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