1.

a solution:
debt 25%
preferred stock 15
Equity 60%
total captal 100%
dividend to grow 6%

equity 0.6
debt 0.25
stock 0.15
1

a)

cost of debt YTM*(1-TAX)

YTM 9%
tax rate 40%

kd 0.054

cost of preference dps/mps

new prefered stock 100

dividend per share 9

kp 0.09
kp with floatation cost 0.094736842105263

cost of equity D1/P0+g

D1 D0*(1+g)
D0 3.7
g 6%
D1 3.922
P0 60
ke 0.125366666666667

b)
WACC
kd 0.054 0.25
kp 0.09 0.15
ke 0.125366666666667 0.6
WACC 0.10222
 2

2.a problems:
debt is issued and added to the capital structire and the proceeds are used to repurchase common stock. all th
debt is issued and shares are repurchased at gthe end of jan 2012
the minimum cash balance is assumed to $126.1 million equal to 902% sales which is 1.5 times of cash to sales
ratio of pepsico. Hill country does not have large and sophisticated treausrey of oeprations of pepsico so a hige
cash to sales is appropriate.

2.b
purchase common stock. all the

ch is 1.5 times of cash to sales

eprations of pepsico so a higer
3.a
total sales 150000
first sales 30% 1250
2% of first sales 30% 25
removing disocuntfrom 1250 1225
70% of total sales 105000
14583.33
average receivables 15833.33
dso average receivables*360/sales 38

3.b
average receivables 14583.33

3.c
average receivables will decrease 13125
discount 262.5
removing discount 12862.5
30% of sales 14087.5
 4.a
operating leverage:

operating leverage measure s the company fixed cost as percentage of its total cost.It is used to evalu
point of a business, as well as the likely profit on individual sales.
organizations will have high and low oeprating leverage
High operating leverage: A large proportion of the companys cost are fixed costs.
Low oeprating leverage: A large proportions of the company costs are variable costs.
operating leverage is is a cost-accounting formula that measures the degree to which a firm or projec
increase operating income by increasing revenue. A business that generates sales with a high gross m
costs has high operating leverage
operating leverage=contribution/EBIT

Financial levergae:it is the ratio of equity and financial debt of a company. It is an important elem

firm's financial policy. ... Because earning on borrowing is higher than interest payable on debt, th
earnings will increase, ultimately boosting the earnings of stockholders
financial Leverage = EBIT/(EBIT-interest)
A figure of 0.5 or less is ideal. In other words, no more than half of the company's assets should b

4.b
Leverage analysis:Leverage analysis means arranging fixed assets in such a way that fixed return is e
leverage analysis are as followsOperating leverage:For Indigo lmt. In 2018 OL is 3.598 and it increase
around 10 times. Because the operating cost is very high in 2019 because of various constraints in ai
revenue have not increase proportionately. Hence OL has gone up by 10 flds and cannot be accepted
also called trading on equity. FL means the use of preference share capital, equity share capital along
bearing on debt on the organization. FL for 2018 was 1.0063 and it increased to 1.0961 in 2019. It is
has increased and has not decreased. This shows that EPS for shareholder has increased and which i
indication.Combined leverage:It measure the total leverage due to both operating and financial lever
4.60 and increased to 36.33 in 2019, as OL increased 10 folds, it impacted on CL also. Hence this incr
accepted because of OL
tal cost.It is used to evaluate the break even

osts.
le costs.
to which a firm or project can
sales with a high gross margin and low variable

y. It is an important element of a
erest payable on debt, the company's total
s

mpany's assets should be financed by debt

way that fixed return is ensured. The types of

L is 3.598 and it increased to 35.233. It increased
various constraints in airline industry. Whereas
and cannot be accepted.Financial leverage:It is
quity share capital along with fixed interest
d to 1.0961 in 2019. It is good indication that FL
as increased and which is good
rating and financial leverage. CL in 2018 was
n CL also. Hence this increase in CL is also not