# Corporate Finance - Corporate Finance Section 2

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• Option : A
• Explanation : The cost of equity capital is the rate of return required by stockholders.

• Option : C
• Explanation : Using the sustainable growth calculation, the growth rate is calculated as:
g = (1 – Dividend payout ratio) (Return on Equity)
= (1 – 0.35) (15%) = 9.8%
Re = (D1 / P0) + g = (\$2.00 / \$40) + 9.80% = 14.75%.

• Option : C
• Explanation : DOL = (quantity * contribution margin) / [(quantity * contribution margin) – fixed costs]
DOL (100,000 units) =(\$12 * 100,000) / [(\$12 * 100,000) – 600,000] = 2.00
DOL (200,000 units) = (\$12 * 200,000) / [(\$12 * 200,000) – 600,000] = 1.33
DOL (300,000 units) = (\$12 * 300,000) / [(\$12 * 300,000) – 600,000] = 1.20
The DOL is lowest at the 300,000 unit production level.

 Sales in 2009 22.5 million computers Average price per computer Rs.90,000 Fixed costs for the period Rs.33 billion Variable costs per computer Rs.70,000

• Option : B
• Explanation : DOL = [Q (P - V)] / [Q (P - V) - F]
=[22.5 million (Rs.90,000 – Rs.70,000)] / [22.5 million (Rs.90,000 – Rs.70,000) – 33 billion] = 1.08
For a 10 percent increase in computers sold, operating income increases by 1.08 * 10% = 10.08%.