Fin 419 Week 5 Team Assignment with Answers

Principles of managerial Finance FIN/419 P12. 4 Break even analysis. Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must care to break even. The CDs will be sold for $13. 98 each, variable operating(a) costs are $10. 48 per CD, and annual fixed operating costs are $73,500. A) Find the operating breakeven point in number of CDs. Q= FC / P- VC Q= 73,500 / 13. 98 10. 48 Q= 21,000 CDs B) Calculate the total operating costs at the breakeven volume found in social function a. EBIT= Q x (P VC) FC EBIT= 21,000 x (13. 98 10. 48) 73,500 EBIT= 21,000 x 3. 5 73,500EBIT= 0 C) If Barry estimates that at a borderline he can sell 2,000 CDs per month, should he go into the music business? 2,000 CDs per month x 12 months = 24,000 CDs. Since the operating breakeven point in number of CDs is 21,000, this factor that Barry will sell 3,000 more CDs that will be a profit. Depending on Barrys outcome of the music store, if he were to go into the music business and sell 2,000 CDs a month, he would make a profit. The profit would not be that much more above the operating breakeven point however, it will still be a profit. I would take the chance and 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? EBIT= Q x (P VC) FC EBIT= 24,000 x (13. 98 10. 48) 73,500 EBIT= 24,000 x 3. 5 73,500 EBIT= 10,500 P12-11 a. $0. 38 b. $1. 28 c. $1. 94 Ebit $24,600 $30,600 $35,000 less interest $9,600 $9,600 $9,600 shed light on profits before taxes $15,000 $21,000 $25,400 Les Taxes $6,000 $8,400 $10,160 benefit profits after taxes $9,000 $12,600 $15,240 Less preferred stock dividends $7,500 $7,500 $7,500 Earings available for common $1,500 $5,100 $7,740 Earings per share $0. 8 $1. 28 $1. 94 a b c P12-24. consolidativeoptimal capital structure Intermediate 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 Profits available to ?common stock $1,000,000 $ 928,000 $ 838,000 $ 676,000 $ 460,000 shares outstanding 200,000 170,000 140,000 110,000 80,000 EPS $ 5. 00 $ 5. 46 $ 5. 99 $ 6. 15 $ 5. 75 b. Debt 0%Debt 15% Debt 30%Debt 45% Debt 60% 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. Chapter 16 trouble 16. For each of the loanword amounts, interest rates, annual payments, and loan terms shown in the following table, calculate the annual interest paid each year oer the term of the loan, assuming that the payments are made at the end of each year. Loan Amount Rate Annual Paym ent Term (in years) Interest pay Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 A $14,000 10% $4,416 4 $1400 $1098. 40 $766. 64 $401. 70 B 17,500 12% 10,355 2 2100 1109. 40 C 2,400 13% 1,017 3 312 220. 35 116. 79 D 49,000 14% 14,273 5 6860 5822. 18 4639. 06 3290. 31 1752. 3 E 26,500 16% 7191 6 4240 3767. 84 3220. 13 2584. 80 1847. 80 992. 89 Problem 16. 5 Lease versus acquire Northwest Lumber Company needs to expand its facilities. To do so, the soused must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows Lease The leasing governing body requires end-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor insurance and other costs will be borne by the lessee.The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Purchase If the firm purchase s the machine, its cost of $80,000 will be financed with a 5-year, 14% loan requiring equal end-of-year payments of $23,302. The machine will be depreciated under MACRS utilize a 5-year recovery period. (See Table 3. 2 on page 108 for the applicable depreciation percentages. ) The firm will pay $2,000 per year for a service contract that covers all maintenance costs insurance and other costs will be borne by the firm.The firm plans to keep the equipment and use it beyond its 5-year recovery period. a. Determine the after-tax cash outflows of Northwest Lumber under each alternative. Year Lease after-tax outflows Purchase after-tax outflows 1 $11,880 $13,622 2 11,880 10,459. 71 3 11,880 15,391. 10 4 11,880 18,512. 89 5 35,880 19,516. 93 b. Find the present treasure of each after-tax cash outflow stream, using the after-tax cost of debt. Year PV of outflows (Lease) PV of outflows (Purchase) 1 $10,893. 96 $12,491. 37 2 10,002. 96 8,807 3 9,171. 6 11,881. 93 4 8,411. 04 13,107. 13 5 23 ,322 12,686. 00 Total $61,801. 32 $58,973. 51 c. Which alternativelease or purchasewould you recommend? Why? The alternative that I would recommend is the purchase option because it has the lower present value of after-tax cash outflows as well as the most desirable. It is the most desirable because by purchasing the machine would be a less costly alternative. References Gitman, L. J. (2009). Principles of Managerial Finance (12th ed. ). Retrieved from https//ecampus. phoenix. edu/content/eBookLibrary2/content/eReader. aspx.