INTRO TO FINANCE

Homework II

This Homework Set builds upon the lecture example of our shoe manufacturing company in order to see what happens when different aspects of the business situation change.

0 The lecture assumed the following situation for Magnificent Shoe Corporation:

Price per pair of shoes sold 75

Variable cost per pair 66

Rent 550

Interest 6% on 1500

This produced an ROE of 26%.

I What happens if Magnificent Shoe Corp manufactures and sells 10% more shoes 110 pairs? Calculate revenue, cost, profit and ROE.

What is the percentage change in revenue and what is the percentage change in profit?

II Instead of a 10% increase in quantity of shoes sold, as in question I, now analyze a 10% increase in price per pair sold (the number of pairs sold is unchanged at 100). Do the same calculations as in I.

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

III Now instead assume the company raised its shoe prices by 5% and, as a result, it sold 5% fewer shoes than the original lecture situation. Do all the calculations.

IV Instead of the original $550 rent, assume it is $750. What is profit when, as in the lecture, 100 pairs of shoes are sold, and what is the percentage increase in profit if 110 pairs are sold? Compare this answer to your results in question I under the original rent amount when sales increased 10%.

V Change the balance sheet to $500 in owners equity, so that we need to borrow $2,000 from the bank (6% interest rate). Otherwise, the situation is the same as the original in class (see 0 above). What is the new leverage ratio? Redo the calculations.

VI For each of the above questions, perform the DuPont Analysis:

ROE = profit margin x turnover ratio x leverage ratio

Profit Margin = profit/revenue; Turnover Ratio = revenue/assets; Leverage as defined in the lecture.

I realize we did this quickly at the end of the last lecture. Dont worry Ill go over it all. Because I intend to review each of these questions during the lecture, I probably will not distribute an answer sheet.