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    Iup504-8 HW 1

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    Bartholomew
    This document contains homework questions about corporate finance and leverages from Chapter 8. It includes 4 multi-part questions asking students to: 1) Calculate gains/losses and breakeven points for a manufacturer. 2) Determine if a company should cut prices to increase sales volume. 3) Compare EPS under leveraged and all-equity capital structures. 4) Analyze two investment plans, determine the EBIT indifference point, and calculate debt ratios given projected EBIT.

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    Iup504-8 HW 1

    Uploaded by

    Bartholomew
    13 views1 page
    This document contains homework questions about corporate finance and leverages from Chapter 8. It includes 4 multi-part questions asking students to: 1) Calculate gains/losses and breakeven points for a manufacturer. 2) Determine if a company should cut prices to increase sales volume. 3) Compare EPS under leveraged and all-equity capital structures. 4) Analyze two investment plans, determine the EBIT indifference point, and calculate debt ratios given projected EBIT.

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    IUP504-8 HW 1

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    This document contains homework questions about corporate finance and leverages from Chapter 8. It includes 4 multi-part questions asking students to: 1) Calculate gains/losses and breakeven points for a manufacturer. 2) Determine if a company should cut prices to increase sales volume. 3) Compare EPS under leveraged and all-equity capital structures. 4) Analyze two investment plans, determine the EBIT indifference point, and calculate debt ratios given projected EBIT.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    13 views1 page

    Iup504-8 HW 1

    Uploaded by

    Bartholomew
    This document contains homework questions about corporate finance and leverages from Chapter 8. It includes 4 multi-part questions asking students to: 1) Calculate gains/losses and breakeven points for a manufacturer. 2) Determine if a company should cut prices to increase sales volume. 3) Compare EPS under leveraged and all-equity capital structures. 4) Analyze two investment plans, determine the EBIT indifference point, and calculate debt ratios given projected EBIT.

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    © All Rights Reserved
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    BS, UIBE IUP504 uiberen

    Corporate Finance

    Ch 8 Leverages
    Homework

    1. The following relationships exist for Cybo Industries, a manufacturer of electronic


    components. Each unit of output is sold for $45; the fixed costs are $175,000;
    variable costs are $20 per unit.
    a. What is the firm’s gain or loss at sales of 5,000 units? Of 12,000 units?
    b. What is the breakeven point?

    2. Aed Corporation has fixed costs of $100,000 and variable costs that are 70 percent
    of the current sales price of $20. Aed sells 30,000 units at this price.
    Aed can increase sales by 10,000 units by cutting its unit price to $18, but variable
    cost per unit won’t change. Should it cut its price?

    3. The NDBA Corporation is comparing two different capital structures, an


    all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, NBA would
    have 200 shares of stock outstanding. Under Plan II, NDBA would have 100
    shares of stock and $5,000 in debt outstanding. The interest rate is 12 percent and
    there are no taxes.
    a. If EBIT is $1,000, which plan results in the higher EPS?
    b. If EBIT is $2,000, which plan results in the higher EPS?
    c. What is the break-even EBIT; that is, what EBIT generates exactly the same
    EPS under both plans?

    4. Eolop company now has an investment plan which needs $5m. The company has
    two financing proposals. Plan A is to borrow $1m at 10% and $4m will need to
    sell stocks at $50 per common share. Plan B would involve a higher financial
    leverage. $2m would be raised by selling bonds with an effective interest rate of
    10% and the remaining $3 million would be raised by selling common stock at the
    $50 price per share. The fixed operating cost will be $800,000. The corporate tax
    rate is 40%.
    a. Find the EBIT indifference level associated with the two financing plans.
    b. Prepare an analytical EBIT-EPS analysis chart for this situation.
    c. If a detailed financial analysis project that long-term EBIT will be in the range
    of $0.8m to $1m annually, which plan will generate higher EPS?
    d. Please calculate DOL, DFL and DCL at the point of EBIT being $1 million
    under plan B.

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