Explore BrainMass

Explore BrainMass

    Geoff's Golf Clubs: degree of financial leverage; breakeven point

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Problem Set 5

    Please answer the following questions in the space provided. You may insert additional lines as necessary in order to complete your response fully.

    1. Geoff's Golf Clubs is considering purchasing a small firm in the same line of business. The purchase would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans will affect the earnings potential of the firm. Total financing required is $4.5 million. The firm currently has $20,000,000 of 12 percent bonds and 600,000 common shares outstanding. The firm can arrange financing of the $4.5 million through a 14 percent bond issue or the sale of 100,000 shares of common stock. The firm has a 40 percent tax rate.

    (a) What is the degree of financial leverage for each plan at $7,000,000 of EBIT?

    Is it possible to use the following formula to answer this question? If so how?

    DFL = percentage change in EPS / percentage change in EBIT

    (b) What is the financial breakeven point for each plan?

    Is it possible to use the following formula to answer this question? If so how?

    EBIT = (P*Q) - FC - (VC*Q) where
    P = sale price per unit
    Q = sales quantity in units
    FC = fixed operating cost per period
    VC = variable operating cost per unit

    © BrainMass Inc. brainmass.com March 4, 2021, 10:00 pm ad1c9bdddf
    https://brainmass.com/business/finance/geoffs-golf-clubs-degree-financial-leverage-breakeven-point-290563

    Attachments

    Solution Preview

    Problem Set 5

    Please answer the following questions in the space provided. You may insert additional lines as necessary in order to complete your response fully.

    1. Geoff's Golf Clubs is considering purchasing a small firm in the same line of business. The purchase would be financed by the sale of common stock or a bond ...

    Solution Summary

    The degree of financial leverages and breakeven points are examined.

    $2.49

    ADVERTISEMENT