# What assumption is made when conducting sensitivity analysis

I have a total of six questions I am stuck on and I am looking for assistance in resolving. See the attached file for the specific questions. Please provide calculations to support question 4.

1. In a tax-free economy, ________ increases the variability of earnings per share for any change in revenues.

2. A company with ________ equity has two classes of common stock with different voting rights.

3. True or False ____ In an initial public offering, shareholders would be able to purchase additional shares at a price below current market price.

4. Janet's Haven is financed 75 percent by common stock and 25 percent by bonds. The expected return on the common stock is 13 percent, and the rate of interest on the bonds is 5.5 percent. Assume that the bonds are default-free and that there are no taxes. Now assume that Janet's issues more debt and uses the proceeds to retire equity. The new financing mix is 67 percent equity and 33 percent debt. If the debt is still default-free, what happens to the expected rate of return on equity? What happens to the expected return on the package of common stock and bonds?

5. What assumption is made when conducting sensitivity analysis? Is this a realistic assumption? Why or why not?

6. Does adding more shares depress stock prices below true value and decrease the motivation to sell stock? Why or why not?

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#### Solution Preview

See the attached file. Thanks

1. In a tax-free economy, ________ increases the variability of earnings per share for any change in revenues.

Debt Financing.

2. A company with ________ equity has two classes of common stock with different voting rights.

Classes of voting capital stock

3. True or False____ In an initial public offering, shareholders would be able to purchase additional shares at a price below current market price.

False. This is true for Rights Issue.

4. Janet's Haven is financed 75 percent by common stock and 25 percent by bonds. The expected return on the common stock is 13 percent, and the rate of interest on the bonds is 5.5 percent. Assume that the bonds are default-free and that there are no taxes. Now assume that Janet's issues more debt and uses the proceeds to retire equity. The new financing mix is 67 percent equity and 33 percent debt. If the debt is still default-free, what happens to the ...

#### Solution Summary

The assumptions made for conducting sensitivity analysis are determined. Answer six short questions on different aspects of finance.