Last year, Neptune Corporation

Last year, Neptune Corporation had sales of \$874,000 and paid taxes of \$61,000. Because of the low interest rate environment, the firm also borrowed some money from the local bank and paid \$51,000 in interest expense. In addition, the firm incurred Variable Costs and Fixed Costs of \$229,000 and \$238,000 respectively. If sales increase by 5%, what should be the percentage change in operating income? SET YOUR CALCULATOR TO 4 DECIMAL PLACES AND ROUND TO 2 DECIMAL PLACES AT THE END. DO NOT ENTER THE % SIGN. IF YOUR ANSWER IS 7.7011%, FOR EXAMPLE, ENTER 7.70.

12. Neptune Corporation’s interest expense increases by 60% but all other expenses and revenues stay the same. The firm’s degree of combined leverage:

will not change

will increase

will decrease

it’s not possible to tell based on the information given

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Last year, Neptune Corporation

Last year, Neptune Corporation had sales of \$873,000 and paid taxes of \$84,000. Because of the low interest rate environment, the firm also borrowed some money from the local bank and paid \$71,000 in interest expense. In addition, the firm incurred Variable Costs and Fixed Costs of \$197,000 and \$269,000 respectively. If operating income increases by 7%, what should be the increase in earnings per share? SET YOUR CALCULATOR TO 4 DECIMAL PLACES AND ROUND TO 2 DECIMAL PLACES AT THE END. DO NOT ENTER THE % SIGN. IF YOUR ANSWER IS 7.7011%, FOR EXAMPLE, ENTER 7.70.

4. Neptune Corporation’s bonds have 15 years to maturity with a coupon rate of 5%. Interest is paid semi-annually. The bonds sold at par value, but the firm paid flotation costs amounting to 6.5% of par value. The firm has a marginal tax rate of 21%. What is the firm’s after-tax cost of debt for these bonds?

5.57%

5.65%

4.46%

4.65%

5.00%

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