David Lyons, the CEO of Lyons Bio Technologies, is concerned about his firm's level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other technology companies average about 30 percent debt, and Mr. Lyons wonders why the difference occurs, and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant. a. Lyons has EBIT = $500,000 and its cost of equity is R(Reu) = 14%. Currently Lyons uses no debt
financing, but it has been told by an investment bank that it could borrow $500,000, $1,000,000, $1,500,000, or $2,000,000 at a cost of R(Rd) = 8%. There are no taxes. Assume that the MM without taxes assumptions hold.
- Complete the table below.
- Graph the relationships between R(Rd), R(Re), and CCC and leverage as measured by D/V.
D (000s) V E D/V E/V R(Rd) R(Re) CCC
$0
$500
$1,000
$1,500
$2,000
b. Using the data given in part a., assume that Lyons is subject to a 40 percent corporate tax rate.
Repeat the part a. analysis under the MM with-tax model.
D V E D/V E/V R(Rd) R(Rd)*(1-T) R(Re) CCC
$0
$500
$1,000
$1,500
$2,000

Suppose that hubert, an economist from an am talk radio program, and kate, an economist from a nonprofit organization on the west coast, are arguing over government bailouts. the following dialogue shows an excerpt from their debate: kate: to recent financial crises, the concept of bailouts is a hot topic for debate among everyone these days. hubert: indeed, it’s gotten crazy! a government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets. kate: i don’t know about that. without a bailout of severely distressed financial firms, the economy will experience a deep recession. the disagreement between these economists is most likely due todifferences in scientific judgments . despite their differences, with which proposition are two economists chosen at random most likely to agree? business managers can raise profit more easily by reducing costs than by raising revenue. central banks should focus more on maintaining low unemployment than on maintaining low inflation. employers should not be restricted from outsourcing work to foreign nations

< back to assignment attempts: 1 1 keep the highest: 1 / 2 2. determining opportunity cost juanita is deciding whether to buy a suit that she wants, as well as where to buy it. three stores carry the same suit, but it is more convenient for juanita to get to some stores than others. for example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $102 for the suit: store travel time each way price of a suit (minutes) (dollars per suit) local department store 15 102 across town 30 88 neighboring city 60 65 juanita makes $42 an hour at work. she has to take time off work to purchase her suit, so each hour away from work costs her $42 in lost income. assume that returning to work takes juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. as you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling. complete the following table by computing the opportunity cost of juanita's time and the total cost of shopping at each location. store opportunity cost of time price of a suit total cost (dollars) (dollars per suit) (dollars) local department store 102 across town 88 neighboring city 65 assume that juanita takes opportunity costs and the price of the suit into consideration when she shops. juanita will minimize the cost of the suit if she buys it from the . grade it now save & continue continue without saving

Dakota products has a production budget as follows: may, 16,000 units; june, 19,000 units; and july, 24,000 units. each unit requires 3 pounds of raw material and 2 direct labor hours. dakota desires to keep an inventory of 10% of the next month’s requirements on hand. on may, 1 there were 4,800 pounds of raw material in inventory. direct labor hours required in may would be: