ter 14 - EOC Questions (CNOW) Questions Problem 14.12 (Breakeven and Leverage) Question of 10 1. 3 Check My Work (2 remaining) 2 3 eBook 4. 4 5 . 6. Wingler Communications Corporation (WCC) produces airpods that sell for $20.70 per set, and this year's sales are expected to be 450,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,500,000, and fixed production (operating) costs at present are $1,560,000. WOC has $4,800,000 of debt outstanding at an interest rate of 9%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and woC is in the 25% Rederal-plus-state tax bracket WOC is a small company with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The company is considering investing $7,200,000 in nen equipment Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,550,000 to $1,800,000. WCC would raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share, a. What would be WCC's EPS (1) under the old production process, (2) under the new process it uses debt, and (3) under the new process if it uses common stock? Do not round Intermediate calculations. Round your answers to the nearest cent. 7 8 0 10. 3. $ b. At what unit sales level would WC have the same EPS assuming it undertakes the investment and finances it with debt or with stock? (Hint: V = variable cost per unit - $8,400,000/450,000, and EPS - [[PQ-VQ-F-TY(1 - 1)]/N. Set EPS Stock - EPSdest and solve fur Q.) Do not found intermeciate calculations. Round your answer to the nearest whole number units c. At what unit sales level would EPS- under the three production financing setups that is under the old plan, the new plan with debt financing, and the new plan with stack financing? (Hint: Note that Vod - $10,500,000/450,000, and use the hints for part b, setting the Es equation equal to zero.) De not reund intermediate calculations, Round your answers to the nearest whole number Old plan: units New plan with debt financing: units New plan with stock financing urits d. On the basis of the analysis in parts a through c, and given that operating leverage is lower under the new setup, which plan is the riskiest, which has the highest expected Ers, and which would you recommend? Assume that there is a fairly high probability of sales falling as low as 250,000 units. Determine E5pt and FPSStock at that sales levalta heip assess the riskiness of the two financing plans. Negative values should be indicated by a minus sign. Da not round intermediate calculations. Round your answers to the nearest cent. EPS LPSStoc: $ Check My Worlc (2 remaining) OK 0 Key Problem 14.12(Breakeven and Leverage Outlon 3 of 10 Submit Assignment for Gradine Save ter 14 - EOC Questions (CNOW) Questions Problem 14.12 (Breakeven and Leverage) Question of 10 1. 3 Check My Work (2 remaining) 2 3 eBook 4. 4 5 . 6. Wingler Communications Corporation (WCC) produces airpods that sell for $20.70 per set, and this year's sales are expected to be 450,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,500,000, and fixed production (operating) costs at present are $1,560,000. WOC has $4,800,000 of debt outstanding at an interest rate of 9%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and woC is in the 25% Rederal-plus-state tax bracket WOC is a small company with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The company is considering investing $7,200,000 in nen equipment Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,550,000 to $1,800,000. WCC would raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share, a. What would be WCC's EPS (1) under the old production process, (2) under the new process it uses debt, and (3) under the new process if it uses common stock? Do not round Intermediate calculations. Round your answers to the nearest cent. 7 8 0 10. 3. $ b. At what unit sales level would WC have the same EPS assuming it undertakes the investment and finances it with debt or with stock? (Hint: V = variable cost per unit - $8,400,000/450,000, and EPS - [[PQ-VQ-F-TY(1 - 1)]/N. Set EPS Stock - EPSdest and solve fur Q.) Do not found intermeciate calculations. Round your answer to the nearest whole number units c. At what unit sales level would EPS- under the three production financing setups that is under the old plan, the new plan with debt financing, and the new plan with stack financing? (Hint: Note that Vod - $10,500,000/450,000, and use the hints for part b, setting the Es equation equal to zero.) De not reund intermediate calculations, Round your answers to the nearest whole number Old plan: units New plan with debt financing: units New plan with stock financing urits d. On the basis of the analysis in parts a through c, and given that operating leverage is lower under the new setup, which plan is the riskiest, which has the highest expected Ers, and which would you recommend? Assume that there is a fairly high probability of sales falling as low as 250,000 units. Determine E5pt and FPSStock at that sales levalta heip assess the riskiness of the two financing plans. Negative values should be indicated by a minus sign. Da not round intermediate calculations. Round your answers to the nearest cent. EPS LPSStoc: $ Check My Worlc (2 remaining) OK 0 Key Problem 14.12(Breakeven and Leverage Outlon 3 of 10 Submit Assignment for Gradine Save