Outflung Computers Has $1,000 in Revenue This Year, Along with COGS

question 29

Multiple Choice

Outflung Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only includes the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and a YTM of 7.9% to its capital structure. M&M Proposition 2: What per cent of the company's costs are fixed, and what per cent are variable with the debt and without the change in leverage?

• A) 27.9%, 72.1%
• B) 72.1%, 27.9%
• C) 25.23, 74.77%
• D) 74.77%, 25.23%

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Definitions:

United States Imports

Goods and services brought into the United States from other countries for sale or use.

Comparative Advantage

The ability of a country or individual to produce a particular good or service at a lower opportunity cost than its trade partners.

Heckscher-Ohlin Theorem

A theory that explains the existence of a country’s comparative advantage by its factor endowments: A country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.

Resource Allocation

The process of assigning and managing assets in a manner that supports an organization's strategic goals.