Show the effect of the price

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1. Chip's Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 93 percent as high if the price is raised 10 percent. Chip's variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm's FCF for the year?

2. Capital Co. has a capital structure, based on current market values, that consists of 26 percent debt, 19 percent preferred stock, and 55 percent common stock. If the returns required by investors are 11 percent, 12 percent, and 14 percent for the debt, preferred stock, and common stock, respectively, what is Capital's after-tax WACC? Assume that the firm's marginal tax rate is 40 percent.

Reference no: EM13324228

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