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essentials managerial finance

Questions and Answers of Essentials Managerial Finance

=+b. Calculate EBIT for sales of 10,000 and 14,000 chairs, respectively.
=+c. Calculate the percentage changes in units sold (with 12,000 chairs as the base level) and related percentage changes in EBIT when sales are 10,000 and 14,000 chairs, respectivelytraveling
=+a. Calculate the breakeven point for the device in months.
=+b. Based ona, should Paul have the system installed in his car?
=+LG 1 P13–6 Breakeven point: Changing costs/revenues Anki is a Finnish manufacturer of rugs.Last year, it sold rugs for €350, with a variable operating cost of €200 per rug and a fixed
=+a. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if all figures remain the same as for last year?
=+b. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if fixed operating costs increase to €1,300,000 and all other figures remain the same?
=+c. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if the selling price decreases to €320, and all other costs don’t change?
=+d. How many rugs must Anki sell this year to achieve the breakeven point for the stated operating costs if the variable operating cost per rug increases to €220 and all other figures remain the
=+e. What conclusions about the operating breakeven point can be drawn for your answers?
=+LG 1 P13–7 Breakeven analysis Antonio and his friend, Giancarlo, are both talented painters.Last year they began painting original artistic postcards, which they gave to their friends as holiday
=+a. Calculate A&G’s operating breakeven point.b. Calculate A&G’s EBIT on the contract.
=+c. If Antonio decides to renegotiate the contract at a price of €5.00 per postcard, what will the EBIT be?
=+d. If the buyer refuses to pay more than €4.00 per postcard, but is willing to negotiate quantity, what quantity of postcards will result in an EBIT of €1,200?
=+e. At this time, A&G’s postcards come in 20 different varieties. While the average variable cost per postcard is €1.50, the actual cost varies from unit to unit. What recommendation would you
=+LG 2 P13–8 EBIT sensitivity Millard’s Enterprises sells wooden baby chairs for $28 per chair. The fixed operating costs are $23,000, and the variable operating cost is$18 per chair.
=+a. Calculate Millard’s Enterprises’ EBIT with an estimated sales of 12,000 chairs.b. Calculate EBIT for sales of 10,000 and 14,000 chairs, respectively.
=+c. Calculate the percentage changes in units sold (with 12,000 chairs as the base level) and related percentage changes in EBIT when sales are 10,000 and 14,000 chairs, respectively
=+Vd. Based on the answer in partc, comment on the sensitivity of changes in EBIT in response to changes in sales.
=+LG 2 P13–9 Degree of operating leverage Diane’s Florist has fixed operating costs of $3,825, variable operating costs of $9.50 per flower arrangement, and an average selling price of $24.50 per
=+a. What is Diane’s Florist’s operating breakeven point in units (flower arrangements)?b. Calculate the EBIT for sales of 260, 300, and 340 flower arrangements, respectively.
=+c. Calculate the percentage changes in units (flower arrangements) sold and EBIT if sales change from the base of 300 flower arrangements to 260 and 340 flower arrangements, respectively.
=+d. Calculate the degree of operating leverage (DOL) at 300 flower arrangements.
=+LG 2 P13–10 Degree of operating leverage: Graphical Olivetti Corporation has fixed operating costs of €850,000, variable costs of €350 per unit of personal computers (PC) produced, and a
=+a. Calculate the operating breakeven point in units of PC produced.b. Compute the degree of operating leverage (DOL) using the following unit sales as a base: 3,500, 4,000, 4,500, and 5,000. Use
=+c. Graph the DOL figures that you computed in part b (on the y-axis) against base sales levels (on the x-axis).
=+d. Compute the DOL at 4,250 units, and add this point to your graph.e. What principle do your graph and figures illustrate?
=+LG 2 P13–11 EPS calculations Maitland Enterprises has $70,000 of 10% (annual interest) bonds outstanding, 500 shares of preferred stock paying an annual dividend of $45 per share, and 6,000
=+a. Determine the earnings per share (EPS) when EBIT is $75,000 and $99,500.b. Calculate the degree of financial leverage (DFL) using EBIT of $75,000 as a base.c. What is the meaning of The Plastic
=+LG 2 P13–13 Financial leverage Margaret has just received an MA degree from Oxford University.She has outstanding school loans that require a monthly payment of £800. She wants to rent a small
=+a. To assess the potential impact of the additional borrowing on her financial leverage, calculate the DFL in tabular form for both the current and proposed rent payments, using Margaret’s
=+c. Should Margaret take on the additional rent payment?
=+P13–14 DFL and graphical display of financing plans Wells and Associates has an EBIT of$67,500. Interest costs are $22,500, and the firm has 15,000 shares of common stock outstanding. Assume a
=+a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm.b. Using a set of EBIT–EPS axes, plot Wells and Associates’ financing plan.
=+c. If the firm also has 1,000 shares of preferred stock paying a $6.00 annual dividend per share, what is the DFL?d. Plot the financing plan, including the 1,000 shares of $6.00 preferred stock,
=+e. Briefly discuss the graph of the two financing plans.
=+LG 1 LG 2 P13–15 Integrative: Multiple leverage measures Hugg-a-Bugg Soft Toys manufactures teddy bears, selling 350,000 teddy bears at $26 per teddy bear. Fixed operating costs are$28,000 while
=+a. Calculate the operating breakeven point in units.b. Calculate the degree of operating leverage (DOL) at base sales levels.c. Calculate the degree of financial leverage (DFL) using the DFL
=+d. Calculate the degree of total leverage (DTL).
=+LG 2 P13–16 Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000.Interest is $10,000
=+a. Compute the degree of operating, financial, and total leverage for firm R.b. Compute the degree of operating, financial, and total leverage for firm W.c. Compare the relative risks of the two
=+d. Discuss the principles of leverage that your answers illustrate.
=+LG 1 LG 2 P13–17 Integrative: Multiple leverage measures and prediction Profarma shpk, an Albanian pharmaceutical company, makes a patented flu medicine that wholesales for L600.Each bottle of
=+a. Calculate Profarma’s operating breakeven point.b. On the basis of the firm’s current sales of 11,000 bottles per year and its interest and preferred dividend costs, calculate its EBIT and
=+c. Calculate the firm’s degree of operating leverage (DOL).d. Calculate the firm’s degree of financial leverage (DFL).
=+e. Calculate the firm’s degree of total leverage (DTL).f. Profarma has entered into a special contract with the Albanian government to produce and sell an additional 5,500 bottles of the flu
=+P13–18 Capital Structure Altin Greene is looking to buy a new apartment in Tirana, the capital of Albania. He visits Credins Bank, and reviews all the data that is required to get a loan. He must
=+a. Calculate the ratio for requirement 1.b. Calculate the ratio for requirement 2.c. Assuming that Altin has adequate funds for the down payment and meets other lender requirements, will he be
=+LG 3 P13–19 Various capital structures Welding Manufacturing is currently totally equity financed. Welding Manufacturing is contemplating a change in its capital structure.Management is
=+LG 3 P13–20 Debt and financial risk Barrilla Group’s CEO has made the forecast of sales shown in the following table.Sales Probability€12,000,000 0.25 15,500,000 0.50 18,300,000 0.25 The
=+a. Compute the earnings before interest and taxes (EBIT) for each level of sales.b. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the
=+c. Barilla has the opportunity to reduce its leverage to zero and pay no interest.This change will require that the number of shares outstanding be increased to 30,000. Repeat part b under this
=+d. Compare you findings in parts b andc, and comment on the effect of the reduction of debt to zero on the firm’s financial risk
=+P13–21 EPS and optimal debt ratio Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share, as shown in the
=+a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
=+b. Graph the relationship between the coefficient of variation and the debt ratio.Label the areas associated with business risk and financial risk.
=+LG 5 P13–22 EBIT-EPS and capital structure Geniaware is considering two capital structures.The key information is shown in the following table. Assume a 24% tax rate.
=+Va. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of€30,000 and €50,000 with 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 €55,000, which structure would you recommend? Why?
=+LG 5 P13–23 EBIT-EPS and preferred stock Suppose SpazioDatti is considering adding preferred stock to its capital structures. The key information is shown in the following table.Assume a 24% tax
=+a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of€30,000 and €40,000 with their associated EPS values.
=+b. Plot the two capital structures on a set of EBIT-EPS axes.
=+Vc. Discuss the leverage and risk aspects of each structure.
=+d. Indicate over what EBIT range, if any, each structure is preferred.
=+e. If the firm is fairly certain that its EBIT will exceed €42,000, which structure would you recommend? Why?
=+LG 3 LG 4 P13–24 Integrative: Optimal capital structure Medallion Cooling Systems has total assets of$10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of
=+a. Calculate earnings per share for each level of indebtedness.
=+b. Use Equation 13.12 and the earnings per share calculated in part a to calculate a price per share for each level of indebtedness.
=+c. Choose the optimal capital structure. Justify your choice.
=+LG 3 LG 4 P13–25 Integrative: Optimal capital structure Theodora works as a financial analyst for Berrios S.A., a construction company headquartered in Athens, Greece. She has been asked to make
=+The company has fixed operating costs of €170,000 per year, and variable operating costs represent 50% of sales. The current capital structure consists of 20,000 shares of common stock that have
=+The company wants to shift the capital structure by increasing debt and decreasing common stock, in order to maximize EPS or shareholder value. The market has assigned four different debt ratios
=+The corporate tax rate in Greece is currently 29%. The market value of the equity for a leveraged firm can be found by using the simplified method (see Equation 13.12).
=+a. Calculate the expected earnings per share (EPS), the standard deviation of EPS, and the coefficient of variation of EPS for the four proposed capital structures.
=+b. Determine the optimal capital structure, assuming (1) maximization of earnings per share and (2) maximization of share value.
=+c. Construct a graph (similar to Figure 13.6) showing the relationships in part b.
=+LG 3 LG 4 P13–26 Integrative: Optimal capital structure Cosmetic Manufacturers is contemplating changing the capital structure of the firm. The firm has $45,000,000 in total assets, earnings
=+a. Complete the following table, showing the values of debt, equity, and the total number of shares of common stock. Assume a book value of $20 per share.
=+Vb. Calculate the total debt and yearly interest expenses based on the before-tax cost of debt at various levels of indebtedness.
=+c. Using an EBIT of $7,500,000, a 40% tax rate, and the information developed in parts a andb, calculate the most likely earnings per share for the firm at each level of indebtedness.
=+d. Using the EPS developed in partc, and the estimates of required return, rs, estimate the value per share at various levels of indebtedness. Mark the level of indebtedness in the following table
=+e. Based on your answer in parts a tod, which debt ratio would you recommend?Explain your answer.
=+LG 3 LG 4 P13–27 Integrative: Optimal capital structure Attica Group, a transportation company, has fixed operating costs of €250,000 and variable costs of 60% of sales. It has made the
=+The company wants to analyze four different capital structures: 0%, 30%, 50%, and 80% debt ratios. The total assets are assumed constant at €4,000,000. Its common stock has a book value of €25
=+a. Calculate the level of EBIT associated with the three levels of sales.b. Calculate the amount of debt, the amount of equity, and the number of shares of common stock outstanding for each of the
=+c. Calculate the annual interest rate on the debt under each of the four capital structures.d. Calculate the EPS associated with each of the three levels of EBIT calculated in part a for each of
=+e. Calculate (1) the expected EPS, (2) the standard deviation of EPS, and (3) the coefficient of variation of EPS for each of the capital structures, using your findings in part d.f. Plot the
=+g. Using the EBIT-EPS data developed in partd, plot the 0%, and the 30% capital structures on the same set of EBIT-EPS axes, and discuss the ranges over which each is preferred. What is the major
=+h. Using the valuation model given in Equation 13.12, and your findings in part e, estimate the share value of each of the capital structures.
=+i. Compare and contrast you findings in parts f and h. Which structure is preferred if the goal is to maximize EPS? Which structure is preferred if the goal is to maximize share price? Which
=+LG 3 P13–28 ETHICS PROBLEM “Information asymmetry lies at the heart of the ethical dilemma that managers, stockholders, and bondholders confront when companies initiate management buyouts or
=+Starstruck Company would like to determine its optimal capital structure. Several of its managers believe that the best method is to rely on the estimated earnings per share (EPS) of the firm
=+a. Based on the given financial data, create a spreadsheet to calculate the estimated share values associated with the seven alternative capital structures. Refer to Table 13.15.
=+b. Use Excel to graph the relationship between capital structure and the estimated EPS of the firm. What is the optimal debt ratio? Refer to Figure 13.6.
=+c. Use Excel to graph the relationship between capital structure and the estimated share value of the firm. What is the optimal debt ratio? Refer to Figure 13.6.
=+d. Do both methods lead to the same optimal capital structure? Which method do you favor? Explain.
=+e. What is the major difference between the EPS and share value methods?

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