Finance Assignment
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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?
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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
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?
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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