Important Information about Leverage and Capital Structure
Not what you're looking for?
I need assistance solving the problems. Can you help?
P12-2 Breakeven comparisons-Algebraic. Given the price and cost data shown in the accompanying table for each of the three firms, F, G, and H, answer the following questions.
Firm F G H
Sale price per unit $18 $21 $30
Variable operating cost per unit 6.75 13.50 12.00
Fixed operating cost 45,000 30,000 90,000
a. What is the operating breakeven point in units for each firm?
b. How would you rank these firms in terms of their risk?
P12-21 Integrative-Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of
$200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment:
Capital Structure debt ratio Cost of debt, kd No. of common stock shares Required return, ks
0% 0% 200,000 12%
15% 8% 170,000 13%
30% 9% 140,000 14%
45% 12% 110,000 16%
60% 15% 80,000 20%
a. Calculate earnings per share for each level of indebtedness.
b. Use Equation 12.12 and the earnings per share calculated in part a to calculate a price per share for each level of indebtedness.
c. Choose the optimal capital structure. Justify your choice.
Purchase this Solution
Solution Summary
The solution explains two problems relating to leverage and capital structure
Solution Preview
For the first question...
A.
The breakeven point is calculated as Fixed cost/(unit contribution margin)
Unit contribution margin = sales price per unit - variable cost per unit
We can calculate the breakeven point for the three firms
Firm F = 45,000/(18-6.75) = 4,000 units
Firm G = 30,000/(21-13.5) = 4,000 units
Firm H = 90,000/(30-12) = 5,000 units
B.
A firm with higher breakeven point will ...
Purchase this Solution
Free BrainMass Quizzes
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.