Show work in excel

1. Wodden Inc. is considering a new product launch. The project will cost $1,500,000 have a 10-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 10,000 units per year; price per unit will be $145, variable costs per unit will be $75 and fixed costs will be $300,000 per year. The required return on the project is 15 percent, and tax rate = 0% (i.e., ignore taxes).

a. What is the accounting break-even level of output for this project?

b. Find the firms operating cash flow (OCF) if the firm just breaks-even on an accounting basis (that is, at Q = accounting break-even level).

c. How many units, at a minimum, must Wodden sell before the projects OCF becomes negative?

d. How many units, at a minimum, must Wodden sell before the projects NPV becomes negative?

e. What if the marketing department of Wodden reports the annual expected sales of 10,000 units. Shall Wodden accept this project? Why? Calculate NPV and IRR at this sales level of 10,000 units.

f. Calculate DOL at the sales level of 10,000 units.

g. What is the new OCF if sales and output level declines from 10,000 units to 9,000 units?

2. At an output level of 2,000 units, you calculate that the degree of operating leverage is 3. Fixed costs are $35,000.

(a) If output rises to 2,500 units, calculate the percentage change in OCF, new OCF and new DOL.

(b) If output falls to 1,500 units, calculate the percentage change in OCF, new OCF and new DOL. (hint: start by finding the OCF at 2,000 units using DOL equation of 1+ FC/OCF)

3. Assume the expected return on market portfolio is 10 percent, T-bills are yielding 2 percent, and the tax rate is 35 percent.

Debt: 6,000 bonds with 7 percent annual coupon. The bonds have par value of $1,000; 20 years to maturity and currently sell for 101.5 percent of par. The bonds floatation cost is 1% of the current market price. Preferred Stock: 10,000 shares of preferred stock.

Preferred stocks pay a dividend of $7 per share and currently sell for $95with a floatation cost of $2 per share

Common Equity: 400,000 shares of common stock. The common stock currently sells for $22 per share and has a beta of $1.09

What is the firms market value capital structure? If Forrest is evaluating a new investment project that has the same risk as the firms typical project, what rate should the firm use to discount the projects cash flows?

4. Honeyridge, Inc., currently has no debt outstanding and has a total market value (equity) of $600,000. EBIT is projected to be $80,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 25 percent lower. Honeyridge is considering a $240,000 debt issue with a 8 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 25,000 shares outstanding. Ignore taxes.

a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession.

b. Repeat part (a) assuming that Finance goes through with recapitalization. What do you observe? (Explain it in terms of percentage change in EPS in both cases: without debt and with debt)

c. What is its break-even EBIT? Find the EPS under both cases at break-even EBIT.