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# Break Even, CAPM

See attached file.

1. Diamond, Inc. only sells 1 carat diamond rings for \$5,000. The cost of the diamonds is \$2,200 per carat. Store rent is \$2,000 per month and a commission is paid to the salesperson for each \$1,000 ring sold. Fixed salaries amount to \$20,000 per month.

How many rings must be sold to break-even each month?
How many rings need to be sold in order to make \$50,000?

2. Using the Capital Asset Pricing Model (CAPM) calculate the expected rate of return for CommArts, Inc.

Risk free Rate of Return = 4%
Market Rate of Return = 12%
CommArts, Inc. Beta = 1.5

3. Calculate the Weighted Average Cost of Capital for CommArts, Inc.
using the information below and the result of your answer in question 2.

CommArts, Inc.
Balance Sheet
Dec. 31, 2009

Current Assets 1,000,000 Curent Liabilities 1,000,000

Long-Term Debt 8% 10,000,000
Property, Plant & Equip. 25,000,000 Equity 15,000,000
26,000,000 26,000,000

Additional Information: Market value of Equity is \$16 million and the marginal tax rate is 38%.

#### Solution Preview

The answers with full explanation is in blue.

1. Diamond, Inc. only sells 1 carat diamond rings for \$5,000. The cost of the diamonds is \$2,200 per carat. Store rent is \$2,000 per month and a commission is paid to the salesperson for each \$1,000 ring sold. Fixed salaries amount to \$20,000 per month.

How many rings must be sold to break-even each month?
Variable Cost = Cost of Diamond + Commission to Salesperson
= 2,200 + ...

#### Solution Summary

The expert determines how many rings must be sold to break-even each month.

\$2.19