Exam 12: Determining the Financing Mix

Potential applications of the break-even model include

Jones Blanket Company sells blankets for $25 each.The variable cost of each blanket is $10.If fixed cost is $4,500,000,then the break-even point is 300,000 units.

Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel,10 million pounds of steel,or 16 million pounds of steel.In tracking some of its costs,Kohler's controller discovered one cost that was $10 per pound at a production level of 8 million pounds,$8 per pound at a production level of 10 million pounds,and $5 per pound at a production level of 16 million pounds.This is an example of a

The MAX Corporation is planning a $4,000,000 expansion this year.The expansion can be financed by issuing either common stock or bonds.The new common stock can be sold for $60 per share.The bonds can be issued with a 12 percent coupon rate.The firm's existing shares of preferred stock pay dividends of $2.00 per share.The company's corporate income tax rate is 46 percent.The company's balance sheet prior to expansion is as follows: MAX Corporation a.Calculate the indifference level of EBIT between the two plans. b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

Which of the following transactions will lower a company's financial leverage?

Variable costs include all of the following EXCEPT

A plant may remain operating when sales are depressed

Bristal Boats,Inc.reports sales of $4,000,000,variable costs of $500,000,fixed operating costs of $1,250,000,and interest expense of $350,000.The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%.If the corporation is able to increase its sales by 25%,then

If fixed costs are $150,000,price per unit is $10,and variable cost per unit is $4,the break-even point is 15,000 units.

Higher bankruptcy costs will result in optimal capital structures using more long-term debt financing.

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

Sunshine Candy Company's capital structure for the past year of operation is shown below. The federal tax rate is 50 percent.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1,000,000 to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives: (1)It can sell a new issue of 20-year debentures with 16 percent interest; or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6,800,000.Find the indifference level of EBIT (with regard to earnings per share)between the suggested financing plans.

Welker Products sells small kitchen gadgets for $15 each.The gadgets have a variable cost of $4 per unit,and Welker Products' fixed operating costs are $220,000 per year.Welker Products' capital structure includes 55% debt and 45% equity.Annual interest expense is $25,000,and the corporate tax rate is 35%. a.Calculate the break-even point in units. b.If Welker Products sells 25,000 units,calculate the firm's EBIT and net income. c.If sales increase ten percent from 25,000 units to 30,000 units,estimate the firm's expected EBIT and net income. d.Does Welker Products use operating leverage and/or financial leverage? Explain.

Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order bicycles this year.Variable costs are 40 percent of sales while fixed costs total $600,000.At what price must each bicycle be sold for Wheely to earn EBIT of $450,000?

One component of a firm's financial structure which is NOT a component of its capital structure is

Mix Sweet Shop bakes and sells pies.Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50.Each pie sells for $15.50 each.The firm expects to sell 500,000 pies annually.What is the break-even point in pies?

Amalgamated Mining,Inc.has very high operating leverage due to the capital intensive nature of the steel business.The firm's CEO is concerned about the variability in the firm's EPS if sales should drop,and decides to take action.Which of the following will reduce the variability in the firm's EPS for a given change in sales?

As production levels increase,

A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.

If sales double,the break-even model assumes that total variable costs will double.