a. Show the operating break-even point if a company has fixed costs of $200, a sales price

Question:

a. Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variables costs of $10.

b. Now, to develop an example which can be presented to PizzaPalace's management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses $10,000 of 12 percent debt. Both firms have $20,000 in assets, a 40 percent tax rate, and an expected EBIT of $3,000.

(1) Construct partial income statements, which start with EBIT, for the two firms.

(2) Now calculate ROE for both firms.

c. What happens to ROE for Firm U and Firm L if EBIT falls to $2,000? What does this imply about the impact of leverage on risk and return?

d. With the above points in mind, now consider the optimal capital structure for PizzaPalace.

(1) For each capital structure under consideration, calculate the levered beta, the cost of equity, and the WACC.

(2) Now calculate the corporate value, the value of the debt that will be issued, and the resulting market value of equity.

e. Describe the recapitalization process and apply it to PizzaPalace. Calculate the resulting the value of the debt that will be issued, the resulting market value of equity, the price per share, the number of shares repurchased, and the remaining shares. Considering only the capital structures under analysis, what is PizzaPalace's optimal capital structure?

Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company's EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures:

A. Show the operating break-even point if a company has

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...