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Finance Questions

1. The price of a product is $1 a unit. A firm can produce this good with variable costs of $0.50 per unit and total fixed costs of $100. What is the break even level of output?

2. If increasing the use of financial leverage (debt financing) increases the return on equity (roe), why would a company not simply continue to use ever- increasing cost of debt financing?

3. a. Given the following schedules,

Debt/Assets Cost of Debt Cost of Equity Cost of Capital?
0% 7% 14% ?
10 7 14 ?
20 7 14 ?
30 8 14 ?
40 8 16 ?
50 10 18 ?
60 12 20 ?

What is firm's cost of capital at the various combinations of debt and equity?

Determine the firm's optimal capital structure by completing the balance sheet below to show the optimal combination of debt and equity financing

Balance Sheet for Firm X as of XX/XX/XX
Assets $100 Debt ?
Equity ?

4. A firm has two investment opportunities. Each costs $1,000, and the firm's cost of capital is 10 percent. The cash inflow of each investment is as follows:

cash inflow A B
1 300 100
2 300 200
3 300 400
4 300 500

a. Calculate the net present value (NPV) for A and B and determine which investment the firm should make?

b. What is the internal rate of return for investment A?

c. What is the payback period for each investment A and B?

5. A firm's annual sales total is 7,890 units. The cost of placing an order is $100 and the per unit carrying costs are $2 a unit. What is the EOQ?

Solution Summary

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