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- Part Aanswer
- Problems on Leverage
- US Treasury: dfi int 20011231
- Notice: National cooperative research notifications: Institute of Electrical and Electronics Engineers
- Preparing a Case for Class Discussion
- Capital
- TEST1 Om Answer
- 201 Syllabus F'11 Gd
- Breakeven Point
- Revision Checklist for as Accounting 9706 FINAL
- 11.Marginal Costing
- Introduction to Marketing
- MB0045 FM Solved Winter Drive Assignment 2012
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- Hotel Bussiness Plan
- Unit - IV -Entrepreneurship
- ACC 561 Final Exam:ACC 561 Final Exam Questions And Answers | Studentehelp
- Fm Leverage
- Intellectual Capital
- Problem Statement

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1

Problem 1

Tubberg Inc. has a single product, which sells for THB45 and has a variable cost of

THB30 per unit.

expenses of THB50,000.

(a) What is the firms break-even point in units?

(b) What is the firms cash break-even point in units?

(c) What is the firms break-even point in sales baht?

(d) What is the firms DOL if sales are 15,000 units above the break-even point?

(e) What is the firms EBIT for the period if Tubbergs sales are 7,500 units below the break-even point?

Problem 2

Now assume that Tubberg (in Problem 1) has begun an impressive modernization program.

To reduce its variable costs to THB15 per unit, the companys annual fixed operating costs

have been allowed to rise to THB2.1 million. Under these new conditions:

(a) What is the firms break-even point in units?

(b) What is the firms break-even point in sales baht?

(c) What is the firms DOL if sales are 15,000 units above the break-even point?

(d) What is the firms EBIT for the period if Tubbergs sales are 7,500 units below the breakeven point?

(e) What are the financial implications of the new level of operating leverage as compared with

Tubbergs operating leverage before the modernization?

Problem 3

Linping Manufacturing is selling 300,000 units of its only product at THB100 per unit.

Variable costs are THB40 per unit, whereas annual fixed operating costs are THB15 million.

(a) What is the firms operating income (EBIT) at this level of sales?

(b) What is the firms DOL at this level of sales?

(c) If sales increase by 5 percent, what is the resulting operating income? Use DOL to answer

this question.

(d) Confirm your answer in Part (c) by preparing an income statement showing the baht levels of

sales, fixed and variable operating costs, and operating income after the 5 percent growth

in sales.

(e) What would happen to operating income if sales decline by 5 percent? Confirm your answer

with a pro forma (forecasted) income statement.

Scott Besley and Eugene F. Brigham, Essentials of Managerial Finance, (13 ed., I.E), Thomson South-Western, 2005.

Problem 4

Chaisee Meekiaw had sales of only THB150,000 last year. However, management

expects this years sales to reach THB187,500 and further estimates that this will cause

operating income (EBIT) to increase by 67.5 percent. What was Chaisees DOL at a

sales level of THB150,000?

Problem 5

Adventure Books sells paperback books for THB6.25 each. The variable cost per book

is THB4.50. At the current annual sales of 150,000 books, the publisher is just breaking

even. It is estimated that if the authors royalties are reduced, the variable cost per

book will drop by THB0.75. Assume the authors royalties are reduced and sales

remain constant; how much more money can the publisher put into advertising (a fixed

operating cost) and still break even?

Problem 6

Educators Inc. will produce 200,000 units this year of the Magic Speller, a learning

device for children. Variable costs are THB40 per unit, and fixed operating costs are

THB3,400,000. What selling price is required for the firm to obtain operating profits of

THB1,800,000 if all 200,000 units are sold?

Problem 7

Olinde Electronics Inc. produces stereo components that sell for THB100 per unit.

Olindes fixed operating costs are THB200,000; 5,000 components are produced and

sold each year; EBIT is currently THB50,000; and Olindes assets (all equity financed)

are THB500,000. Olinde estimates that it can change its production process, adding

THB400,000 to investment and THB50,000 to fixed operating costs. This change will

(1) reduce variable costs per unit by THB10 and (2) increase output by 2,000 units, but

(3) the sales price on all units will have to be lowered to THB95 to sell the 7,000

components. The firm uses no debt, and its WACC is 10 percent. Ignore taxes.

(a) Should Olinde make the change?

(b) Would Olindes DOL increase or decrease if it made the change? What about its

operating break-even point?

(c) Would the new situation expose the firm to more or less business risk than the old one?

(d) Suppose Olinde was unable to raise additional equity financing and had to borrow

the THB400,000 to make the investment at an interest rate of 8 percent. Use the

(extended) DuPont equation to find the expected ROA of the investment. Should

Olinde make the change if debt financing must be used (Hint: Compare ROA with

WACC.).

(e) What would Olindes DFL be if the THB400,000 was borrowed at the 8 percent

interest rate?

Problem 8

At the current sales of THB 500,000, a firms EBIT is THB150,000 and DOL is 1.25.

(a) What are the firms break-even sales in baht?

(b) At the current sales level, what are operating fixed costs?

(c) At the break-even sales level, what are total variable costs in baht?

(d) If the firms EBIT were twice as high as that in this year, what would be the

corresponding sales in baht?

(e) If the firms EBIT were twice as high as that in this year, what would be the

corresponding percentage change of sales from the current sales level?

(f) If the sales next year are forecasted to be THB 450,000, what will be the

expected EBIT?

Problem 9

Revenue and operating costs (THB)

Total revenue

FCO

Q0=0

Q1

Q2

Q3

Q4

Q (units)

(a) Is it true that a firm uses an operating leverage?

(b) Is it true that DOLQ1 is negative?

(c) Is it true that DOL at any Q above Q2 is positive?

(d) Is it true that DOLQ3 is greater than DOLQ4?

(e) In absolute terms, is it true that DOLQ2 is the highest?

(f) Is it true that, at all positive sales levels, for one percentage change in sales,

there is more-than-one percentage change in EBIT (ignoring the sign)?

(g) In terms of Q, P, V, and/or FCO, when sales equal Q0, what is the firms EBIT?

Problem 10

The Raya Corporation, which manufactures ski goggles, has decided to also

manufacture ski poles. The ski poles will sell for THB44 per set. Fixed operating costs

are THB480,000 annually. The company expects to sells 30,000 sets of ski poles

during the first year of operations. What is the maximum variable cost per set if the

company is to just break even in its first year of operations?

Problem 11

Financial data of EJ, Inc. at the sales levels of Q1 and Q2 units are presented next.

Answer each question independently unless otherwise noted.

Q1

Q2

Sales (THB)

375,000

425,000

255,000

289,000

30,000

46,000

(b) If sales are expected to be THB437,500, what is the minimum selling

price per unit that the firm could charge so that it breaks even. Assume

Q1 = 15,000, and Q2 = 17,000 units.

(c) Find the DOL's at the two levels of sales, and explain the results.

(d) Find the sales needed if the firm wants to earn THB50,000 EBIT.

Problem 12

The DCL and DOL of Loveprint and Co. are 3 and 1.5, respectively. The firm plans to

replace the existing machine. The new machine will raise the fixed operating costs, but

reduce the variable cost per unit. The financial manager of the firm believes that the

DOL is equal 1.8 after the replacement. She also expects that the maximum DCL the

firm prefers to maintain is 4.5. Loveprint and Co. plans to use no preferred stock.

(a) Find the DFL before the replacement and the maximum DFL after the

replacement.

(b) If the firm expects that the EBIT after the replacement are THB6,000,000,

find the maximum fixed financial costs that the firm could pay off.

(c) After the replacement, what is the firms EBIT that makes the firm

financially break even?

(d) Assume the fixed financial costs before the replacement were THB2,400,000.

What is the maximum additional amount of debt that the firm could borrow

(or else it goes bankrupt) if the interest rate is 15% per annum.

Problem 13

One day, while walking around Taphrachan, Thongkliaw saw the fortuneteller's

crowded. Thus she is interested in doing a fortune-telling business. She started her

business by hiring the 4 most famous fortunetellers in the Thaphrachan area. Each

teller asks for a THB2,500 salary, and food allowances for THB100 a day. Thongkliaw

must pay THB500 monthly for stationary. The price is set at THB50 per time per head,

and 20% of this price will be forwarded to the tellers as the participating allowances.

Assume that there are 30 days a month, and that each question is independent, unless

specified otherwise.

(a) Find the contribution margin per time per head.

(b) In each month, find the minimum number of customers coming to see the

tellers so that Thongkliaw starts earning some profits.

(c) If Thongkliaw wants to make profits of THB6,300 in the first month,

calculate the expected average customers per teller per day.

(d) News about the accuracy of the Thongkliaw's tellers is spread out. Thus,

there are 750 customers in December. Find the DOL in December. Also

explain what the finding means.

(e) If the number of customers is expected to be 795 in January, forecast the

expected earnings in January. Use DOL found in Part (d) to help solve

this problem.

(f) To reward the tellers, Thongkliaw thinks about raising the participating

fees. If, in January, she expects to earn THB8,028 of profits and to have

795 customers, find the maximum participating fees (in baht) per time per

head. (The customers are still charged the same price.)

(g) The expected number of customers in January is 795 because of fame,

but would be as high as 950 if the print ads are around Taphrachan and

vicinity. This could happen because the ads offer discounts to group

customers: customers in groups of 5 will be charged at 70% of the

normal price. Thongkliaw expects that 40% of 950 customers will come

in the groups of 5. Assume that the costs of the print ads are THB1,500

(ignoring the time value of money), that there are still 4 tellers, and that

the forecast is relatively precise. Should Thongkliaw go ahead with the

print ads? Show the calculation. Assume that the participating fees in

baht are still the same as those before discounting.

Problem 14

(a) Given the graphs below, calculate the (total) operating fixed costs, variable costs

per unit, and sales price for Firm A. Firms B (total) fixed operating costs are

THB120,000, its variable costs per unit are THB4, and its sales price is THB8 per

unit.

Firm A

Total revenue

Total fixed operating costs

Units (thousands)

Firm B

Total revenue

Total fixed operating costs

Units (thousands)

(b) Which firm has the higher degree of operating leverage? Explain.

(c) At what sales level, in units, do both firms earn that same operating profit?

Problem 15

What would be the effect of each of the following on the firms operating and financial

break-even point? Indicate the effect in the space provided by placing a (+) for an

increase, a (-) for a decrease, and a (0) for no effect. When answering this question,

assume everything except the change indicated is held constant.

Operating Breakeven

Financial Breakeven

(a)

_____________

_____________

(b)

_____________

_____________

(c )

_____________

_____________

(d)

_____________

_____________

(e)

_____________

_____________

(f)

_____________

_____________

Problem 16

Van Auken Lumber

Income statement for year ended December 31, 20X0 (THB Thousands)

(36,000)

(25,200)

Gross profit

10,800)

(6,480)

Finance costs

Profit before income taxes

Income taxes (40%)

4,320)

(2,880)

1,440)

(576)

864)

Dividends (50%)

432)

(a) Compute the DOL, DFL, and DTC for Van Auken Lumber.

(b) Interpret the meaning of each of the numerical values computed in Part (a).

(c) Briefly discuss some ways Van Auken Lumber can reduce its DTL.

Problem 17

Gordons Plants has the following partial income statement (THB) for 20X0:

Profit before finance costs and income taxes (EBIT)

Finance costs

Profit before income taxes

Income taxes (40%)

4,500)

(2,000)

2,500)

(1,000)

1,500)

1,000)

(a) If Gordons has no preferred stock, what is its financial breakeven point? Show

that the amount you come up with actually is the financial breakeven by

recreating the portion of income statement shown here for the amount.

(b) What is the DFL for Gordons? What does this value mean?

(c) If Gordons actually has preferred stock that requires payment of dividends equal

to THB600, what would be the financial breakeven point? Show that the amount

you compute is the financial breakeven by recreating the portion of income

statement shown here for the amount. What is the DFL in this case?

Problem 18

Straight Arrow Company manufactures golf balls. It uses no preferred stock. The

following income statement information is relevant for Straight Arrow in 20X1:

Selling price per sleeve of balls

Variable cost of goods sold (% of selling price)

THB5

75%

THB50,000

Interest expense

THB10,000

Number of common shares

40%

20,000

(a) What level of sales does Straight Arrow needs to achieve in 20X1 to breakeven

with respected to operating income?

(b) At its operating breakeven, what will be the EPS for Straight Arrow?

(c) How many sleeves of golf balls (in units) does Straight Arrow need to sell in 20X1

to attain the financial breakeven point?

(d) If Straight Arrow expects its sales to be THB300,000 in 20X1, what are its DOL,

DFL, and DTL?

(e) Based on the DTL in Part (d), compute the EPS Straight Arrow would expect

20X1 if sales actually turn out to be THB270,000.

Problem 19

Newin and Friends Co. has just recovered from a severe slump in business and has

projected sales of THB3,600,000 for the next year. Based on the existing production

equipment, total fixed operating costs and total variable operating costs are expected

to be THB1,200,000 and THB1,800,000, respectively, so that the EBIT will be

THB600,000. The selling price per item produced is THB50.

The firm has a THB1,500,000 five-year promissory note outstanding on which it pays

interest of 15 percent. Newin and Friends Co. plans to pay off the five-year note with

funds borrowed at a lower interest rate.

The production manager has suggests the modernization of the old equipment. This

would result in a 30 percent increase in fixed operating costs and a 20 percent decrease

in per unit variable operating costs.

The general manager agrees with modernization plan as long as the firms risk, as

measured by the DTL, does not change. This could be made possible by the refunding

of the outstanding five-year note. Newin and Friends Co. will borrow THB1,500,000

from a bank in order to pay of the note. Assume that sales price and sales will be

unaffected by the cost change.

How much lower must the interest rate on the new THB1,500,000 loan be for the

modernization plan to become acceptable in the eyes of the manager?

Problem 20

Bunjongsake Corporation will begin operation next year to produce a single product at

a price of THB12 per unit. Bunjongsake Corporation has a choice of two methods of

production: Method A, with variable costs of THB6.75 per unit and fixed operating costs

of THB675,000; and Method B, with variable costs of THB8.25 per unit and fixed

operating costs of THB401,250. To support operations under either production method,

the firm requires THB2,250,000 in assets, and it has established a debt ratio of 40

percent. The cost of debt is 10 percent. The tax rate is 30 percent, but irrelevant to

the problem.

(a) The sales forecast for the coming year is 2,000,000 units. Under which method

would EBIT be more adversely affected if sales did not reach the expected levels?

(b) Given the firms present debt, which method would produce the greater percentage

increase in earnings per share for a given increase in EBIT?

(c) Calculate DTLs under each method, and then evaluate the firms total risk under

each method.

(d) Is there some debt under Method A that would produce the same DTLA as DTLB

that you calculated in Part (c)?

Problem 21

. (C) 30

DCL 3.60

C 1,100,000 700,000

DOL DCL 1.74 3.00

C

DOL 1.80 6

C 8

Problem 22

(S) S

120,000 30

100

S 80 65

20,000 S 0

15

S 210,000

23,000 S (

)

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