Question 1: What does it mean when it is said that a company is excessively leveraged? What could be the effects of excessive leverage?
Question 2: Differentiate operating leverage, financial leverage, and the total leverage of the firm. Do these types of leverage complement one another? Why or why not?
Question 3: (Weighted average cost of capital)
In the spring of last year Tempe Steel learned that the firm would need to re-evaluate the company’s weighted average cost of capital following a significant issue of debt. The firm now has financed 42% of its assets using debt and 58% using equity. Calculate the firm’s weighted average cost of capital where the firm’s borrowing rate on debt is 8.3%, it faces a 35% tax rate, and the common stockholders require a 20.6% rate of return.
Tempe Steels WACC is___%(Round to three decimal places.)