Break-even analysis Free Spirit Industries Inc. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $11.25 per unit. Given Free Spirit's cost structure, it vill have tosl units to break even on this project (Qar) Free Spirit's marketing and sales director doesnt think that the firm's market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 200,000 units. However, she also thinks that the demand for Free Spirit's product is relatively inelastic (so the fim can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 200,000 units, what price must it set to break even? $58.19 per unit BO $67.38 per unit $73.50 per unit DO $61.25 per unit What affects the firm's operating break-even point? Several factors affect a firm's operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firm's break-even quantity-assuming that only the listed factor changes and all other relevant factors remain constant. Answer Choices 1.347,826, 30 2. A 3. Increase, Decrease, No Change 4. Increase, Decrease, No Change 5. Increase, Decrease, No Change 6. High, Low 7.1.73, 1.28, 1.34, 1.15 What affects the firm's operating break-even point? 0,000, 380,952, 92,754 Several factors affect a firm's operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a rm's break-even quantity that only the listed factor changes and all other relevant factors remain constant. B, C, assuming Increase Decrease No Change The firm depreciates its fixed assets more quickly over a 3 shorter life The product's sales price increases. The amount of debt increases, causing the firm's total interest expense to increase. degree of operating leverage. When a large percentage of a firm's costs are fixed, the firm is said to have a Globo-Chem Co. is an all-equity firm, and it has a beta of 1 . It is considering changing its capital structure to 70% equity and 30% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 35%. 9. A, B, C, D, E What will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? 7 Now consider the case of another company: U.S. Robotics Inc. has a curent capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%, and its tax rate is 35%. It currently has a levered beta of 1.25. The risk-free rate is 3.5%, and the risk premium on the market is 796. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 8%. Use the Hamada equation to unlever and releve r the beta for the new level of debt. What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? Which of the following statements regarding a firm's optimal capital structure are true? Check all that apply 9 A The optimal capital structure maximizes the firm's EPS The optimal capital structure minimizes the firm's WACC. The optimal capital structure maximizes the firm's stock price. The optimal capital structure minimizes the firm's cost of debt. The optimal capital structure minimizes the firm's cost of equity D
