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1) A change in fixed cost: A
1) A change in fixed cost:
A. Has no effect on the contribution margin.
B. Always decreases profits.
C. Decreases the contribution margin ratio.
D. Increases the contribution margin ratio
E. Increases the contribution margin.
2) Apex Ltd. has a tax rate of 30% and the interest rate on debt of 8%. The firm's WACC is 11.36% and debt-asset ratio is 60%. What is the expected rate of return to equity holders?
Expert Solution
1)
As we know,
Contribution Margin = Selling Price per Unit - Variable Cost per Unit
So, there is no use of fixed cost. If there is any change in fixed cost, it will not affect contribution margin.
The correct option is A "Has no effect on the contribution margin".
2)
Computation of Expected Rate of Return to Equity Holders:
WACC = Weight of Equity*Cost of Equity + Weight of Debt*Cost of Debt*(1-Tax Rate)
11.36% = 40%*Cost of Equity + 60% * 8%*(1-30%)
11.36% = 40% * Cost of Equity + 3.36%
11.36% - 3.36% = 40% * Cost of Equity
8% = 40% * Cost of Equity
Cost of Equity = 8%/40% = 20%
So, Expected Rate of Return to Equity Holders is 20%
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