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Breakeven Point, Discount Rate, DRIP, and Market Portfolio

Need help with the following questions:

1. Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $400,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $3.60. How many units does the firm need to sell to reach the cash break-even point?

2. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. Is this project worth pursuing if the discount rate is 10 percent? How high can the discount rate be before you would reject the project?

3. A firm considers initiating an aggressive dividend reinvestment plan (DRIP) in which it allows its investors to use dividends to buy shares at a discount of 40 percent from current market value. The firm's financial manager argues that the policy will benefit shareholders by giving them the opportunity to buy additional shares at a deep discount and will benefit the firm by providing a source of cash. Is the manager correct?

4. You are considering the purchase of real estate which will provide perpetual income that should average $50,000 per year. How much will you pay for the property if you believe its market risk is the same as the market portfolio's? The T-bill rate is 5 percent, and the expected market return is 12.5 percent.

5. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if:
a. the interest rate is 5 percent?
b. the interest rate is 20 percent?
c. Why do your answers to (a) and (b) differ?

6. True or false? If false, correct the statement.
a. A company may not generally pay a dividend out of legal capital.
b. A company may not generally pay a dividend if it is insolvent.
c. The effective tax rate on capital gains can be less than the stated tax rate on such gains.
d. Corporations are not taxed on dividends received from other corporations.

Solution Summary

This solution contains step-by-step calculations to determine finance variables like cash break even point, cash flows, dividends, property rates, and tax rate. It also contains brief explanations and definitions.

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