WACC and EPS

Question 1

Assume that we are in a MM world for this and the following question. A company is financed by 50% equity (in market values) and 50% of debt. The cost of equity is 15%, the cost of debt is 5%. What is the company’s WACC? (enter a number in percent but without the percent sign)

Answer 1

10

Question 2

A company is financed by 50% equity (in market values) and 50% of debt. Cost of equity is 15%, cost of debt is 5%. What is the company’s WACC if the company increases debt to 70% and equity to 30%? (enter a number in percent, but without percent sign)

Answer 2

10

Question 3

Increasing leverage for a low growth company is

• EPS accretive
• EPS dilutive

Answer 3

EPS ACCRETIVE

Question 4

Leverage is EPS accretive if

Answer 4

The earnings yield is higher than the tax-adjusted interest rate

Question 5

If a company with high growth buys a company with low growth and finances the acquisition with equity, this acquisition will be:

• accretive
• dilutive

Answer 5

ACCRETIVE

Question 6

If a company with a low PE ratio buys a company with a high PE ratio and finances the acquisition with equity, the operation will be:

• accretive
• dilutive

Answer 6

DILUTIVE