Question 1:

Poker Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (with fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)?

Question 2:

Question 3:

Question 4:

Question 2, Part 2;

Now, assume that VF is considering changing from its original zero debt capital structure to a new capital structure with even more debt. This recapitalization results in changes in the cost of debt and equity, and thus to a new WACC and a new value of operations. Assume VF raises the amount of new debt indicated below and uses the funds to purchase and hold T-bills until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?
Debt/Value	40%		Value of new debt	$213,333
Equity/Value	60%		New WACC	9.0%
Question 3, Part 3: Based on the data in the previous two questions, what would the stock price be if VF issued the new debt and immediately used the proceeds to repurchase stock?

Can someone give an explanation to the answer provided? Thank you

Assigned Problem 2 Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt--HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs? Applicable to Both Firms Firm HD's Data Firm LD's Data $200 S40 35% Assets Debt ratio 50% Debt ratio 30% Interest rate 12% Interest rate 10% Tax rate