Balance Sheet to ANSWER QUESTION

Assets Liability

Euip - 7,000 10,000 owners equity

Material - 2,000

1,000

10,000

year 1 manufacturer sells 200 pairs/$80 per pair

revenue = 80*200 =16,000

variable cost - labor 40/pair

material 15/pair

energy 5/pair

variable cost = (40+15+5)*200 =12,000

Fixed - rent 1,500

over head 1,000

total cost = 12,000+2,500+14,500

profits = 1500

R.0.E = 1500/10,000 = 15%

return on equity

=profits/common equity

year 2 - 10% increase in shoes (DO EVERYTHING OVER WITH 10% INCREASE IN SHOES)

220 PAIRS

IIn the lecture, based on the beginning balance sheet of our shoe company, we examined the effects on revenue, profits and ROEof a 10% increase in quantity of shoes sold.Now analyze the effects of a 10% increase in price per pair sold (the number of pairs sold is unchanged at 200).

Which is better - an increase in sales or the same percentage increase in price?Why?

IIFurther along the lecture, the company expanded its production and sales to 225 pairs by borrowing $2,000 and thereby increasing its assets accordingly.

For this question, instead assume the company expanded by changing its balance sheet to $9,000 in owners' equity and $3,000 in debt.In other words, it borrowed $2,000 to expand, as in the lecture example, plus an additional $1,000 in borrowing which it returned to owners - it replaced some equity with debt.Recalculate profits and ROE, and perform the DuPont Analysis, examining how each factor changed.

"Coverage ratio" measures the company's ability to service debt.It is measured as the amount of money available to pay interest divided by the amount of interest that needs to be paid; i.e., the money coming down the waterfall just before it reaches the "financing cost cliff" divided by the financing cost on that cliff.Compare the coverage ratio in this question to the ratio in the lecture example of $10,000 equity & $2,000 debt case?

IIISuppose the IRS imposes a 20% tax on profits.Return to the original situation (200 pairs, 80 price per pair sold, 60 operating cost per pair).How much tax is paid?What are "Before-Tax Profits," After-Tax Profits" and "After-Tax ROE?"

Similar to the in-class example, what are the percentage changes in revenue, taxes, before- and after-tax profits due to a ten percent increase in unit sales?

Say a weakening macro-economy causes shoe sales to decline to 110.What are "Before-Tax Profits," After-Tax Profits" and "After-Tax ROE?"

Keep sales at 200 pairs.But labor costs (wages, benefits, pensions) jump to 75/pair from 40.Perform the same calculations.Why is this loss making situation qualitatively different from the above?