Exercise I [Operating leverage] Calculate the operating leverage for sales of 50,000 units. Investigate the effects of sales up to 60,000 units on the volume of operating profits. Company X produces 10,000 products A monthly, which: unit variable cost is USD 16.00 The monthly fixed costs are USD 60,000.00 The sale price of the product is USD 25.00 The number of items sold in individual periods is as follows Recommendation - Prepare a profit and loss account according to the concept of variable cost accounting. - Calculate the break-even point for this company. - Calculate the operating leverage and interpret its significance for the period of the lowest and highest sales (January and April). \begin{tabular}{|l|l|l|l|l|} \hline & & & & \\ \hline BEP in units & & & & \\ \hline BEP in USD & & & & \\ \hline Operating leverage & & & & \\ \hline \end{tabular} Please evaluate two entities A and B. Both have capital in the amount of 500 while the company is being fully financed by equity and the company B is financed with 40% of owner1s equity and 60% with external debt financing. Both companies have recorded the same EBIT in the amount of 160. The interest rate for external financing is being amounted at 15% and the income corporate tax rate is 19%. 1) Which of the company was more profitable from the owner's perspective? 2) If the EBIT would equal 75 how the profitability issue would change for both companies? 3) If EBIT would equal 75 and within the capital structure of company B we would change the equity into debt how the change would have made impact on the profitability? 4) If the EBIT would equal 60 how the profitability issue would change for both companies? Exercise IV. [Financial leverage and the company value] The value of the company's total assets is USD 20 million. The company is financed in 50% with liabilities and in 50% with equity. The interest rate on liabilities is 10% and the value of the ratio "book value per share" is 20 USD. Income tax is 19%. The Management Board is analyzing two strategies aimed at increasing the value of assets by USD 30 million. I. Capital would be obtained by issuing shares at the price of USD 20, as well as additional liabilities, while the relation between the value of liabilities and the value of the company's assets would not change. The new commitments would require 12% interest payments annually. II. Capital would only be obtained through the issue of new shares at an issue price of USD 20 and the entity's fixed costs of USD 200,000. a. If the overall ROA (EBIT / Total assets) is 12%, calculate the net profit per share before deciding to change the strategy; b. What is the level of leverage in the implementation of each strategy and without the implementation of the strategy; c. If the company's shares could be sold for USD 40 each, what impact would it have on the earnings per share resulting from the application of strategy I and strategy
