Question 1 (16 points) Carol Inc is considering the following three prices to charge customers for each of the candy packets they produce: i) $2.20 ii) $2.00 iii) $1.70 The relevant data for decision-making is below: Fixed Costs = $1200 Variable Costs = $0.50 per unit Calculate the following: a) The Breakeven Point for each price level b) Using price of $2.20 what would be the new breakeven point if (1) fixed costs decreased to $1000 all else remaining the same, (2) Variable costs increased to $0.75 all else remaining the same. Draw a graph to represent scenario (1) and (2) comparing with the original data for price of $2.20. [Total of two graphs] Question 2 (12 points) Greater Manufacturing is evaluating two different operating structures which are described below. The firm has annual interest expense of $250, common shares outstanding of 1,000, and a tax rate of 40 percent.
(a) For each operating structure, calculate (a1) EBIT and EPS at 10,000, 20,000, and 30,000 units. (a2) the degree of operating leverage (DOL) and degree of total leverage (DTL) using 20,000 units as a base sales level. (a3) the operating breakeven point in units. (b) Which operating structure has greater operating leverage and business risk? (c) If Greater Manufacturing projects sales of 20,000 units, which operating structure is recommended?
Question 3 (14 points) Table 13.1
a) Assuming a 40 percent tax rate, what is the financial breakeven point for each plan? (See Table 13.1) b) What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 13.1) c) What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 13.1) d) At about what EBIT level should the financial manager be indifferent to either plan? (See Table 13.1) e) Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1) Question 4 (12 points) A firm has had the indicated earnings per share over the last three years:
(a) If the firm's dividend policy was based on a constant payout ratio of 50 percent, determine the annual dividend for each year. (b) If the firm's dividend policy was based on a fixed dollar payout policy of 50 cents per share plus an extra dividend equal to 75 percent of earnings per share above $1.00, determine the annual dividend for each year. Question 5 (12 points) Mongoose Company has released the following information.
(a) What are Mongoose Company’s current earnings per share? (b) What is Mongoose Company’s current P/E ratio? 3
(c) Mongoose Company wants to use half of its earnings either to pay shareholders dividends or to repurchase shares for inclusion in the firm's employee stock ownership plan. If the firm pays a cash dividend, what will be the dividend per share received by existing shareholders? (d) Instead of paying the cash dividend, what if the firm uses half of its earnings to pay $55 per share to repurchase the shares, what will be the firm's new EPS? What should be the firm's new share price? (e) Compare the impact of a stock dividend and stock repurchase on shareholder wealth. Question 6 (12 points) Farrah Inc.’s accounts receivable totaled $451,000 on January 30, 2003. An aging summary of receivables at this date follows:
The firm extends 30-day credit terms to all its credit customers. (a) Prepare an aging schedule for Farrah Inc.. (b) Evaluate the firm's collection performance. Question 7 (6 points) Penelope Production Plant uses 2,400 units of a product per year on a continuous basis. The product carrying costs are $60 per year and ordering costs are $250 per order. It takes 20 days to receive a shipment after an order is placed and the firm requires a safety stock of 8 days of usage in inventory. (a) Calculate the economic order quantity (round up to the nearest whole unit. (b) Calculate the total cost per year to order and carry this item....