Exam 12: Determining the Financing Mix

Balon Plastics,Inc.is trying to decide how best to finance a proposed $10,000,000 capital investment.Under Plan I,the project will be financed entirely with long-term 9 percent bonds.The firm currently has no debt or preferred stock.Under Plan II,common stock will be sold to net the firm $20 a share; presently,1,000,000 shares are outstanding.The corporate tax rate for Balon is 40 percent. a.Calculate the indifference level of EBIT associated with the two financing plans. b.Prepare an EBIT-EPS analysis chart,showing the intersection of the two financing plan lines. c.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why? d.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?

The "threat hypothesis"

JKE,Inc.has a break-even sales level of $10,000,000 and has fixed costs of $4,000,000 per year.The selling price per unit is $200.What is the variable cost per unit?

Capital structure is the mix of the long-term sources of funds used by the firm.

If we ignore bankruptcy and agency costs then the optimal capital structure for a firm under the moderate view would be 100% debt.

The Modigliani and Miller hypothesis does NOT work in the "real world" because

Which of the following would be considered a fixed cost in a manufacturing setting?

Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

Based on the data contained in Table A,what is the break-even point in units produced and sold? TABLE A

Which of the following would NOT be a part of a firm's capital structure?

Because there are no fixed financing costs,a common stock plan line in an EBIT-EPS analysis chart will have a less-steep slope than will a bond plan line.

DXZ,Inc.currently produces one product which sells for $250 per unit.The company's fixed costs are $75,000 per year; variable costs are $205 per unit.A salesman has offered to sell the company a new piece of equipment which will increase fixed costs to $100,000.The salesman claims that the company's break-even point will not be altered if the company purchases this equipment.What will be the company's new variable cost per unit?

Operating leverage is measured as the responsiveness of the firm's earnings before interest and taxes relative to fluctuations in sales.

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,

Business risk refers to the relative dispersion (variability)of a company's net income.

Which of the following is a fixed cost?

ACME,Inc.reported the following income statement for 2009: If ACME's sales next year increase by 20%,what will ACME's earnings per share be?

Financial structure is another term for capital structure.

As the volume of production increases the variable cost-per unit of the product decreases.

Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.