Fin- 419 Assignments from the Readings Week V

Topics: Stock, Finance, Corporate finance Pages: 5 (1022 words) Published: December 1, 2011
Assignments from the readings week V
Loraine Santos García
University of Phoenix
Finance for Decision Making FIN/419
22 de noviembre de 2011
Profesor: David Piñeiro Negrón

Assignments from the readings week V
12.4
Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for \$13.98 each, variable operating costs are \$10.48 per CD, and annual fixed operating costs are \$73,500. 1. Find the operating breakeven point in number of CDs. 2. Calculate the total operating costs at the breakeven volume found in part a. 3. If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business? 4. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c?

(a)[pic]
(b)Total operating costs ’ FC + (Q ( VC)
Total operating costs ’ \$73,500 + (21,000 ( \$10.48) Total operating costs ’ \$293,580
(c)2,000 ( 12 ’ 24,000 CDs per year. 2,000 records per month exceeds the operating breakeven by 3,000 records per year. Barry should go into the CD business. (d)EBIT ’ (P ( Q) − FC − (VC ( Q)

EBIT ’ (\$13.98 ( 24,000) − \$73,500 − (\$10.48 ( 24,000) EBIT ’ \$335,520 − \$73,500 − \$251,520
EBIT ’ \$10,500

12.19
Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate.

|Source of capital |Structure A |Structure B | |Long-term debt |\$100,000 at 16% coupon rate |\$200,000 at 17% coupon rate | |Common stock |4,000 shares |2,000 shares | | | | |

a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Plot the two capital structures on a set of EBIT–EPS axes. c. Indicate over what EBIT range, if any, each structure is preferred. d. Discuss the leverage and risk aspects of each structure. e. If the firm is fairly certain that its EBIT will exceed \$75,000, which structure would you recommend? Why?

(a)Using \$50,000 and \$60,000 EBIT:
| |Structure A | |Structure B | |EBIT |\$50,000 |\$60,000 | |\$50,000 |\$60,000 | |Less: Interest |16,000 |16,000 | |34,000 |34,000 | |Net profits before taxes |\$34,000 |\$44,000 | |\$16,000 |\$26,000 | |Less: Taxes |13,600 |17,600 | |6,400 |10,400 | |Net profit after taxes |\$20,400 |\$26,400 | |\$9,600 |\$15,600 | |EPS (4,000 shares) |\$5.10 |\$6.60 | | | | |EPS (2,000 shares) | | | |\$4.80 |\$7.80 |

Financial breakeven points:
|Structure A |Structure B | |\$16,000 |\$34,000 |

(b)

[pic]

(c)If EBIT is expected to be below \$52,000, Structure A is preferred. If EBIT is expected to be above \$52,000, Structure B is preferred. (d)Structure A has less risk and promises lower returns as EBIT increases. B is more risky since it has a higher financial breakeven point. The steeper slope...