# Business Finance Questions

Each widget generates contribution margin of $100 ($250 selling price, less $150 variable expenses). The total fixed expenses are $35,000, the break-even point is:

A. 250

B. 350

C. 233

D. 140

Each widget the selling price is $2, and the variable cost per unit $1.60. The total fixed expenses are $12,000, the break-even point is:

A. 30,000

B. 12,000

C. 7,500

D. 6,000

XYZ has a target capital structure calling for 30% debt, 10% preferred stock, and 60% common equity. It before-tax cost of debt, is 11%; it after-tax cost of debt is 11 %( 0.6) = 6.6%; its cost of preferred stock is 10.3%; its cost of common equity is 14.5%; it marginal tax rate is 40%; and all of its new equity will come from retained earnings. XYZ weighted average cost of capital (WACC) is:

A. 11%

B. 11.7%

C. 10.7%

D. 10%

The present values are $7,471,000 for the cost of owning and $7, 367,000 for the cost of leasing. What is the net advantage to leasing (NAL)?

A. $148,300

B. $10,400

C. $1,483,000

D. $104,000

If receivables are $666,667 and sales are $10 million, the receivable collection period is:

A. 30 days

B. 24 days

C. 20 days

D. 34 days

If average inventories are $ 2 million and sales are $ 10 million, the inventory conversion period is

A. 66 days

B. 30 days

C. 72 days

D. 42 days

The cash is $1,200,000 the account receivable is $6,000,000 and current liabilities is $7,000,000. What is the acid-test (quick) ratio?

A. 1.03

B. 2.21

C. 1.27

D. 1.32

Voltar Company manufactures and sells a telephone answering machine. The company's contribution format income statement for the most recent year is given below:

Total Per Unit Percent of Sales

Sales (20,000 units) $1,200,000 $60 100%

Less variable expenses 900,000 45 ? %

Contribution margin 300,000 $15 ? %

Less fixed expenses 240,000

Net income

Management is anxious to improve the company's profit performance and has asked for several items of information.

Required

1. Compute the company's break-even point in both units and sales dollars. Use the equation method.

2. Refer to original data. Assume that next year management wants the company to earn a minimum profit of $90,000. How many units will have to be sold to meet this target profit figure?

3. Refer to the original data. Compute the company's margin of safety in both dollar and percentage form.

a) Compute the company's degree of operating leverage at the present level of sales.

b) Assume that through a more intense effort by the sales staff the company's sales increase by 8% next year. By what percentage would you expect net income to increase? Use the operating leverage concept to obtain your answer.

4. In an effort to increase sales and profits, management is considering the use of a higher- quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%.

a) Compute the company's new break-even point in both units and dollars of sales. Use the contribution margin method

#### Solution Preview

Each widget generates contribution margin of $100 ($250 selling price, less $150 variable expenses). The total fixed expenses are $35,000, the break-even point is:

A. 250

B. 350

C. 233

D. 140

Answer: B

Break-even point in units = Total fixed expenses/Contribution margin per unit

= 35,000/100 = 350

Each widget the selling price is $2, and the variable cost per unit $1.60. The total fixed expenses are $12,000, the break-even point is:

A. 30,000

B. 12,000

C. 7,500

D. 6,000

Answer: A

Contribution margin per unit = Selling price - Variable cost per unit

Break-even point in units = Total fixed expenses/Contribution margin per unit

= 12,000/(2 - 1.60) = 30,000

XYZ has a target capital structure calling for 30% debt, 10% preferred stock, and 60% common equity. It before-tax cost of debt, is 11%; it after-tax cost of debt is 11 %( 0.6) = 6.6%; its cost of preferred stock is 10.3%; its cost of common equity is 14.5%; it marginal tax rate is 40%; and all of its new equity will come from retained earnings. XYZ weighted average cost of capital (WACC) is:

A. 11%

B. 11.7%

C. 10.7%

D. 10%

Answer: B

Then, we can replace the information found to find WACC. However, as the total amount of debt is not given, we are unable to find the weight of debt. We will assume that both debt and common stock is 50% weight.

WACC = WdKd(1 - T) + WpKp + WcKs

where Wd is the weight of ...

#### Solution Summary

This solution is comprised of a detailed explanation to find the break-even point.