This file of FIN 419 Week 5 Individual Assignment Assignments from the Readings shows the solutions to the following problems:
Chapter 12: Problem 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.
a. Find the operating breakeven point in number of CDs.
b. Calculate the total operating costs at the breakeven volume found in part a.
c. If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business?
d. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c?
Chapter 12: Problem 12.19
Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate.
a. 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?
Chapter 12: Problem 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:
a. Calculate earnings per share for each level of indebtedness.
b. Use Equation 12.12 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.
Chapter 16: Problem 16.2
For each of the loan amounts, interest rates, annual payments, and loan terms shown in the following table, calculate the annual interest paid each year over the term of the loan, assuming that the payments are made at the end of each year.
Chapter 16: Problem 16.5
a. Determine the after-tax cash outflows of Northwest Lumber under each alternative.
b. Find the present value of each after-tax cash outflow stream, using the after-tax cost of debt.
c. Which alternative—lease or purchase—would you recommend? Why?
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