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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?