CH.5 HW problems (12)

Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $530,000, but 5 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $4.90. How many units does the firm need to sell to reach the cash break-even point? Note: Round your answer to the nearest whole number.

102,755 explanation: Explanation Cash-related fixed costs = Total fixed costs − Depreciation =$530,000−(0.05×$530,000)=$530,000-0.05×$530,000 = $530,000 − $26,500 = $503,500 Cash break‐even=Cash−related fixed costs(Price−Variable cost per unit)Cash break‐even=Cash-related fixed costsPrice-Variable cost per unit = $503,500 ÷ $4.90 = 102,755 units

The capital structure for Cain Supplies is: Cain SuppliesDebt @ 9%$ 100,000Common stock, $ 10 par200,000Total$ 300,000Common shares20,000 Compute the stock price for Cain if it sells at 19 times earnings per share and EBIT is $50,000. The tax rate is 20 percent. Note: Do not round intermediate calculations. Round your answer to 2 decimal places.

31.16 explanation: interest 0.09 x 100,000= 9,000 eps = 32800 / 20,000 = 1.64 stock price = 10 x 1.64 = 31.16

Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-lender relationships. Assume the Mitaka Company has a sales volume of 135,000 units at a price of $30 per unit; variable costs are $9 per unit, and fixed costs are $1,900,000. Interest expense is $410,000. What is the degree of combined leverage for this Japanese firm? Note: Round your answer to 1 decimal place.

5.4 Explanation DCL=Q(P−VC)[Q(P−VC)−FC−I]DCL=��-VC[��-VC-FC-�] =135,000($30−9)[135,000($30−9)−$1,900,000−410,000]=135,000$30−9[135,000$30−9-$1,900,000-410,000] =135,000($21)[135,000($21)−$2,310,000]=135,000$21[135,000$21-$2,310,000] =$2,835,000[$2,835,000−$2,310,000]=$2,835,000[$2,835,000-$2,310,000] = $2,835,000 ÷ $525,000 = 5.4x

Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here. LenowHallDebt @ 10%$ 100,000Debt @ 10%$ 200,000Common stock, $10 par200,000Common stock, $10 par100,000Total$ 300,000Total$ 300,000Common shares20,000Common shares10,000 a. Complete the following table given earnings before interest and taxes of $20,000, $30,000, and $120,000. Assume the tax rate is 30 percent. Note: Round your answers to 2 decimal places. Leave no cells blank be certain to enter 0 wherever required. b-1 What is the EBIT/TA rate when the firm's have equal EPS? b-2. What is the cost of debt? b-3. State the relationship between earnings per share and the level of EBIT. c. If the cost of debt went up to 12 percent and all other factors remained equal, what would be the break-even level for EBIT?

a. 6.67; 0.35; 0; lenow eps > hall eps 10.00; 0.70; 0.70; lenow eps = hall eps 40.00; 3.85; 7.00; lenow eps < hall eps c-1 ; 10 b-2; 10 d-3; equals c- 36,000

Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt at 10 percent and half with common stock having a par value of $8. Ms. Park, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 10 percent. The tax rate is 45 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3 million long-term bond would be sold at an interest rate of 12 percent and 375,000 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 375,000 shares of stock would be sold at $8 per share and the $3,000,000 in proceeds would be used to reduce long-term debt. a. Compute earnings per share considering the current plan and the two new plans. Note: Round your answers to 2 decimal

a. 0.44; 0.35; 0.44 b-1 0; -0.53; 0.15 b-2 0.88; 1.23; 0.73 b-4 plan D c-1 0.44; 0.26; 0.50 c-2 plan e

U.S. Steal has the following income statement data: Units SoldTotal Variable CostsFixed CostsTotal CostsTotal RevenueOperating Income (Loss)60,000$ 120,000$ 50,000$ 170,000$ 360,000$ 190,00080,000160,00050,000210,000480,000270,000 The top row of the table has the beginning values and the bottom row of the table has the ending values. a. Compute the degree of operating leverage (DOL) based on the formula below. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. DOL = Percent change in operating income ÷ Percent change in units sold b. Recompute DOL using the formula given below. There may be a slight difference due to rounding. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. DOL=Q(P−VC)(Q(P−VC)−FC)DOL=��-VC��-VC-FC Q represents beginning units sold (all calculations should be done at this level). P can be found by dividing total revenu

a. 1.26 b. 1.26 Explanation: DOL = Percent change in operating income ÷ Percent change in units sold =[($270,000−190,000)$190,000][(80,000−60,000)60,000] =[$270,000−190,000$190,000][80,000−60,00060,000] = 1.26 DOL=Q(P−VC )Q(P−VC)−FCDOL=��-VC ��-VC-FC Q = 60,000 P = Total revenue ÷ Units sold = $360,000 ÷ 60,000 = $6 VC = Total variable costs ÷ Units sold = $120,000 ÷ 60,000 = $2 FC = $50,000 DOL=60,000($6−2)60,000($6−2)−$50,000DOL=60,000$6−260,000$6−2-$50,000 = 1.26 Given the information in the problem, you can also compute the DOL as: DOL=Q(P−VC)[Q(P−VC)−FC]DOL=QP-VC[QP-VC-FC] =(Total revenue−Total variable costs)(Total revenue−Total variable costs−Fixed costs)=Total revenue−Total variable costsTotal revenue−Total variable costs−Fixed costs =($360,000−120,000)($360,000−120,000−50,000)=$360,000−120,000$360,000−120,000−50,000 = 1.26

DeSoto Tools Incorporated is planning to expand production. The expansion will cost $3,700,000, which can be financed either by bonds at an interest rate of 6 percent or by selling 74,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: DESOTO TOOLS INCORPORATEDIncome Statement 20X1Sales$ 3,170,000Variable costs951,000Fixed costs817,000Earnings before interest and taxes$ 1,402,000Interest expense570,000Earnings before taxes$ 832,000Taxes @ 35%291,200Earnings after taxes$ 540,800Shares270,000Earnings per share$ 2.00 After the expansion, sales are expected to increase by $1,670,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to $1,384,000. The tax rate is 35 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating l

a. 1.58; 1.69; 2.67 b. debt: 4,840,000; 1,452,000; 1,384,000; 2,004,000; 792,000; 1,212,000; 270,000; 2.92 Equity: 4,840,000; 1,452,000; 1,384,000; 2,004,000; 570,000; 1,434,000; 344,000; 2.71 c. debt; 1.69; 1.65; 2.80 equity; 1.69; 1.40; 2.36

The Harding Company manufactures skates. The company's income statement for 20X1 is as follows: HARDING COMPANYIncome StatementFor the Year Ended December 31, 20X1Sales (10,500 skates @ $60 each)$ 630,000Variable costs (10,500 skates at $25)262,500Fixed costs200,000Earnings before interest and taxes (EBIT)$ 167,500Interest expense62,500Earnings before taxes (EBT)$ 105,000Income tax expense (30%)31,500Earnings after taxes (EAT)$ 73,500 a. Compute the degree of operating leverage. Note: Round your answer to 2 decimal places. b. Compute the degree of financial leverage. Note: Round your answer to 2 decimal places. c. Compute the degree of combined leverage. Note: Round your answer to 2 decimal places. d. Compute the break-even point in units (number of skates). Note: Round your answer to the nearest whole number.

a. 2.19 b. 1.60 c. 3.50 d. 5,714 explanation: Explanation DOL=Q(P−VC)[Q(P−VC)−FC]DOL=�(�−��)[�(�−��)−FC] =10,500($60−25)[10,500($60−25)−$200,000]=10,500$60−25[10,500$60−25-$200,000] = 2.19 DFL=EBIT(EBIT−I)DFL=EBITEBIT−� =$167,500($167,500−62,500)=$167,500$167,500−62,500 = 1.60 DCL=Q(P−VC)[Q(P−VC)−FC−I]DCL=��−��[��−��-FC-�] =10,500($60−25)[10,500($60−25)−$200,000−62,500]=10,500$60−25[10,500$60−25-$200,000-62,500] = 3.50 BE=FC(P−VC)BE=FC�−�� =$200,000($60−25)=$200,000$60−25 = 5,714 skates

Shawn Pen & Pencil Sets Incorporated has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Ms. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce costs per unit to $2.00. a. Compute the following break-even points. Note: Do not round intermediate calculations. b. As a result of Bic's suggestion, will the break-even point go up or down?

a. 32,000; 40,000 b. the break-even will go up Explanation Current break‐even point=Fixed costs(Price−Variable cost per unit)Current break‐even point=Fixed costsPrice-Variable cost per unit =$80,000($5.00−2.50)=$80,000$5.00-2.50 = $80,000 ÷ $2.50 = 32,000 units Proposed break‐even point=Fixed costs(Price−Variable cost per unit)Proposed break‐even point=Fixed costsPrice-Variable cost per unit =$120,000($5.00−2.00)=$120,000$5.00-2.00 = $120,000 ÷ $3.00 = 40,000 units The break-even point will go up.

Eaton Tool Company has fixed costs of $255,000, sells its units for $66, and has variable costs of $36 per unit. a. Compute the break-even point b. Ms. Eaton comes up with a new plan to cut fixed costs to $200,000. However, more labor will now be required, which will increase variable costs per unit to $39. The sales price will remain at $66. What is the new break-even point? Note: Round your answer to the nearest whole number. c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

a. 8,500 b. 7,408 c. probability will be less explanation Explanation Break‐even point=Fixed costs(Price−Variable cost per unit)Break‐even point=Fixed costsPrice-Variable cost per unit =$255,000($66−36)=$255,000$66-36 = $255,000 ÷ $30 = 8,500 units New break‐even point=Fixed costs(Price−Variable cost per unit)New break‐even point=Fixed costsPrice-Variable cost per unit =$200,000($66−39)=$200,000$66-39 = $200,000 ÷ $27 = 7,407 units The break-even level decreases. With less operating leverage and a smaller contribution margin, profitability is likely to be less than it would have been at very high volume levels.

Ms. Gold is in the widget business. She currently sells 1.5 million widgets a year at $6 each. Her variable cost to produce the widgets is $4 per unit, and she has $1,550,000 in fixed costs. Her sales-to-assets ratio is six times, and 30 percent of her assets are financed with 10 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 35 percent. Her sister-in-law, Ms. Silverman, says Ms. Gold is doing it all wrong. By reducing her price to $5.00 a widget, she could increase her volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $4 per unit. Her sales-to-assets ratio would be 7.5 times. Furthermore, she could increase her debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant. a. Compute earnings per sh

a. 8.70 b. 6.19 c. no