Now consider Router’s use of financial leverage. Information Table 2 indicates the relationship between the amount of debt used and the cost of debt. What is the source of that information, and how reliable would you expect it to be?

 

Table 2. Information Pertaining to Router Inc. 2a. Operating Leverage Inputs Input Data, Both Plans Price Unit Demand, Expected Tax Rate Data for Plan L Variable cost/unit Total fixed op. costs Non-cash component of FC Maximum units of capacity Required Capital (or assets) Data for Plan H Variable cost/unit Total fixed op. costs Non-cash component of FC Maximum units of capacity Required Capital (or assets) $384 16,000 40% Half of the fixed operating costs under Plan L are cash costs. The other half consists of depreciation and amortization charges. $329 $400,000 $200,000 20,000 $1,500,000 Half of the fixed operating costs under Plan H are cash costs. The other half consists of depreciation and amortization charges. $150 $2,800,000 $1,400,000 35,000 $4,000,000 2b. Sales Revenue Probability Distribution Sales Data Applicable to L Sales Data Applicable to H Factor: Units Sold: Units Sold: Multiply it by Factor times expected sales, Probability of above to find constrained to max level Factor times expected expected sales, units from constrained this market units Revenue to max level Revenue Market conditions Awful (Exp. x 0) Poor (Exp x .5) Expected Units Good (exp. 1.5) Great (exp. X 2) (Thousands) (Thousands) (Thousands) $0 $3,072,000 $6,144,000 $7,680,000 $7,680,000 $5,376,000 condition produced (Thousands) 0.10 0.000 0.20 0.500 8,000 16,000 20,000 8,000 16,000 $3,072,000 $6,144,000 $9,216,000 0.40 1.000 0.20 1.500 24,000 2.000 Expected Values: Standard Deviation (SD): Coefficient of Variation (CV): 0.10 20,000 14,000 32,000 $12,288,000 16,000 $6,144,000 6,261 0,45 $2,404,220 0.45 8,764 0.55 $3,365,207 0.55 pter 3: Powerline Network Corporation: Ope rating Leverage, Financial Leverage, and The Optimal Capital Struc