Question
Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of
Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of cash flow. One company is considering a proposal to produce and market a caviar-flavored dog food. It will involve an initial investment of $90,000 that can be depreciated straight-line over 10 years. In each of years 1-10, the project is forecast to produce sales of $100,000, and to incur variable costs of 50% of sales and some fixed costs. The corporate tax rate is 30%. Assume that the company if entirely financed by equity. The stock price is $20 per share. The dividend per share is expected to be $1 next year and is expected to grow at a rate of 5% each year in the future.
1) Calculate the cost of capital for this firm.
2) Calculate the economic and accounting break-even levels of fixed costs
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