Exam 12: Determining the Financing Mix

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.

QuadCity Manufacturing,Inc.reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate =35%.QuadCity's break-even point in sales dollars is

A decrease in the level of production results in decreased fixed cost per unit.

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

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.

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

Corporations that are heavily committed to investments in fixed assets that are expected to produce cash flow over many years generally favor long-term debt to the extent that they borrow.

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?

Based on the data contained in Table A,what is the break-even point in sales dollars? TABLE A

Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.

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

Borrowing funds using short-term debt,such as commercial paper,and using the proceeds to invest in long-term investments,creates a re-financing risk that can force firm's to sell assets at distressed prices if financing becomes unavailable.

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?

A plant may remain operating when sales are depressed

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

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

An increase in financial leverage will increase the absolute value of EPS,everything else equal.

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 no matter what the production level for the year.This is an example of a

Optimal capital structure is

The more fixed-charge securities (such as bonds and preferred stock)the firm employs in its financial structure,the greater its financial leverage.