FIN/419

P12.4 Break even analysis.

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. A) Find the operating breakeven point in number of CDs.

Q= FC / P- VC

Q= 73,500 / 13.98 – 10.48

Q= 21,000 CDs

B) Calculate the total operating costs at the breakeven volume found in part a. EBIT= Q x (P – VC) – FC

EBIT= 21,000 x (13.98 – 10.48) – 73,500

EBIT= 21,000 x 3.5 – 73,500

EBIT= 0

C) If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business? 2,000 CDs per month x 12 months = 24,000 CDs. Since the operating breakeven point in number of CDs is 21,000, this means that Barry will sell 3,000 more CDs that will be a profit. Depending on Barry’s outcome of the music store, if he were to go into the music business and sell 2,000 CDs a month, he would make a profit. The profit would not be that much more above the operating breakeven point; however, it will still be a profit. I would take the chance and go into the music business. D) How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c? EBIT= Q x (P – VC) – FC

EBIT= 24,000 x (13.98 – 10.48) – 73,500

EBIT= 24,000 x 3.5 – 73,500

EBIT= 10,500

P12-11

a. $0.38

b. $1.28

c. $1.94

Ebit| | | | $24,600| $30,600| $35,000|

less interest| | | $9,600| $9,600| $9,600|

Net profits before taxes| | $15,000| $21,000| $25,400| Les Taxes| | | | $6,000| $8,400| $10,160|

Net profits after taxes| | $9,000| $12,600| $15,240|

Less preferred stock dividends| $7,500| $7,500| $7,500| Earings available for common| | $1,500| $5,100| $7,740| Earings per share| | | $0.38| $1.28| $1.94|

| | | | a| b| c|

P12-24. : Integrative–optimal capital structure

Intermediate

a.

Debt Ratio| 0%| | 15%| | 30%| | 45%| | 60%|

EBIT| $2,000,000| | $2,000,000| | $2,000,000| | $2,000,000| | $2,000,000| Less: Interest| 0| | 120,000| | 270,000| | 540,000| | 900,000| EBT| $2,000,000| | $1,880,000| | 1,730,000| | $1,460,000| | $1,100,000| Taxes @40%| 800,000| | 752,000| | 692,000| | 584,000| | 440,000| Net profit| $1,200,000| | $1,128,000| | $1,038,000| | $ 876,000| | $ 660,000| Less: Preferred

dividends|

200,000| |

200,000| |

200,000| |

200,000| |

200,000|

Profits available to

common stock|

$1,000,000| |

$ 928,000| |

$ 838,000| |

$ 676,000| |

$ 460,000|

# shares outstanding| 200,000| | 170,000| | 140,000| | 110,000| | 80,000| EPS| $ 5.00| | $ 5.46| | $ 5.99| | $ 6.15| | $ 5.75|

b.

Debt: 0%Debt: 15%

Debt: 30%Debt: 45%

Debt: 60%

c.The optimal capital structure would be 30% debt and 70% equity because this is the debt/equity mix that maximizes the price of the common stock.

Chapter 16

Problem 16.2 For each of the loan amounts, interest rates, annual payments, and loan terms shown in the following table, calculate the annual interest paid each year over the term of the loan, assuming that the payments are made at the end of each year.

Loan| Amount| Rate| Annual Payment| Term (in years)| Interest Paid Year 1| Year 2| Year 3| Year 4| Year 5| Year 6| A| $14,000| 10%| $4,416| 4 | $1400| $1098.40| $766.64| $401.70| | | B| 17,500| 12%| 10,355| 2| 2100| 1109.40| | | | | C| 2,400| 13%| 1,017| 3| 312| 220.35| 116.79| | | | D| 49,000| 14%| 14,273| 5| 6860| 5822.18|...