# Fin- 419s from the Readings Week V Assignment

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Assignments from the readings week V Loraine Santos Garcia University of Phoenix Finance for Decision Making FIN/419 22 de noviembre de 2011 Profesor: David Pineiro Negron Assignments from the readings week V 12. 4 Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for \$13. 98 each, variable operating costs are \$10. 48 per CD, and annual fixed operating costs are \$73,500. 1. Find the operating breakeven point in number of CDs. 2. Calculate the total operating costs at the breakeven volume found in part a. 3.

If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business? 4. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c? (a)[pic] (b)Total operating costs ‘ FC + (Q ( VC) Total operating costs ‘ \$73,500 + (21,000 ( \$10. 48) Total operating costs ‘ \$293,580 (c)2,000 ( 12 ‘ 24,000 CDs per year. 2,000 records per month exceeds the operating breakeven by 3,000 records per year. Barry should go into the CD business. (d)EBIT ‘ (P ( Q) ? FC ? (VC ( Q) EBIT ‘ (\$13. 98 ( 24,000) ? \$73,500 ? (\$10. 48 ( 24,000) EBIT ‘ \$335,520 ? \$73,500 ? \$251,520

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EBIT ‘ \$10,500 12. 19 Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. |Source of capital |Structure A |Structure B | |Long-term debt |\$100,000 at 16% coupon rate |\$200,000 at 17% coupon rate | |Common stock |4,000 shares |2,000 shares | | | | | . Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Plot the two capital structures on a set of EBIT–EPS axes. c. Indicate over what EBIT range, if any, each structure is preferred. d. Discuss the leverage and risk aspects of each structure. e. If the firm is fairly certain that its EBIT will exceed \$75,000, which structure would you recommend? Why? (a)Using \$50,000 and \$60,000 EBIT: |Structure A | |Structure B | |EBIT |\$50,000 |\$60,000 | |\$50,000 |\$60,000 | |Less: Interest |16,000 |16,000 | |34,000 |34,000 | |Net profits before taxes |\$34,000 |\$44,000 | |\$16,000 |\$26,000 | |Less: Taxes |13,600 |17,600 | |6,400 |10,400 | |Net profit after taxes |\$20,400 |\$26,400 | |\$9,600 |\$15,600 | |EPS (4,000 shares) |\$5. 0 |\$6. 60 | | | | |EPS (2,000 shares) | | | |\$4. 80 |\$7. 80 | Financial breakeven points: |Structure A |Structure B | |\$16,000 |\$34,000 | (b) [pic] (c)If EBIT is expected to be below \$52,000, Structure A is preferred. If EBIT is expected to be above \$52,000, Structure B is preferred. (d)Structure A has less risk and promises lower returns as EBIT increases. B is more risky since it has a higher financial breakeven point.

The steeper slope of the line for Structure B also indicates greater financial leverage. (e)If EBIT is greater than \$75,000, Structure B is recommended since changes in EPS are much greater for given values of EBIT. 12. 21 Medallion Cooling Systems, Inc. , has total assets of \$10,000,000, EBIT of \$2,000,000, and preferred dividends of \$200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment: |Capital structure debt ratio |Cost of debt,kd |No. f common stock shares |Required return,ks | |0% |0% |200,000 |12% | |15 |8 |170,000 |13 | |30 |9 |140,000 |14 | |45 |12 |110,000 |16 | |60 |15 |80,000 |20 | a. Calculate earnings per share for each level of indebtedness. b. Use Equation 12. 12 [pic] and the earnings per share calculated in part a to calculate a price per share for each level of indebtedness. c. Choose the optimal capital structure. Justify your choice. (a) Debt Ratio |0% | |15% | |30% | |45% | |60% | |EBIT |\$2,000,000 | |\$2,000,000 | |\$2,000,000 | |\$2,000,000 | |\$2,000,000 | |Less interest |0 | |120,000 | |270,000 | |540,000 | |900,000 | |EBT |\$2,000,000 | |\$1,880,000 | |1,730,000 | |\$1,460,000 | |\$1,100,000 | |Taxes @40% |800,000 | |752,000 | |692,000 | |584,000 | |440,000 | |Net profit |\$1,200,000 | |\$1,128,000 | |\$1,038,000 | |\$876,000 | |\$660,000 | |Less preferred dividends | | | | | | | | | | | |200,000 | |200,000 | |200,000 | |200,000 | |200,000 | |EPS |\$5. 00 | |\$5. 6 | |\$5. 99 | |\$6. 15 | |\$5. 75 | (b)[pic] Debt: 0%Debt: 15% [pic][pic] Debt: 30%Debt: 45% [pic][pic] Debt: 60% [pic] (c)The optimal capital structure would be 30% debt and 70% equity because this is the debt/equity mix that maximizes the price of the common stock. Referencias Gitman, L. J. (2009). Principles of managerial finance (12th ed. ). Boston, MA: Pearson Addison Wesley CERTIFICATE OF ORIGINALITY I certify that the attached paper is my original work. I affirm that any section of the paper which has been submitted previously is attributed and cited as such, and that this paper has not been submitted by anyone else.

I confirm that I have cited all sources from which I used language, ideas, and information, whether quoted verbatim or paraphrased. Any assistance I received while producing this paper has been acknowledged in the References section. I have obtained written permission or have included a release from the copyright holder for any trademarked material, logos, images from the Internet, or other sources. I further agree that my name typed on the line below is intended to have, and shall have, the same validity as my handwritten signature. Student’s signature (name typed here is equivalent to a signature): Loraine Santos Garcia 22 de noviembre de 2011 ———————– Comparison of Financial Structures EBIT (\$) EPS(\$) EBIT (\$)

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