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# Finance Questions

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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 ?
\$100

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
year
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?

https://brainmass.com/economics/investments/finance-questions-89946

#### Solution Summary

Step by step solutions with a word and an excel file.

\$2.19

## Answers to Various Financial Questions

Jenny just married Tim. Jenny remains to work as a cashier for a restaurant, and her monthly income has averaged \$2,840 a month over the past year. Tim is working as a computer programmer and earns \$3,000 a month. Their shared monthly income let them to live comfortably. Yet they have been unable to save any money for urgent situation.
According to Tim, "It's hard to believe, but we don't even have a savings account because we spend almost everything we make." Every month, they deposit each of their paychecks in separate checking accounts. Tim pays the rent and makes the car payment. Pam buys the groceries and pays the utilities. They use the money left over to purchase new clothes and the other "necessities" for enjoying life.
In an effort to make wise use of credit, the Turner have examined various sources that could serve their current and future financial needs. In the assessment process, they compared the APR along with various fees and potential charges.
Tim and Jenny are also learning about various actions that might be useful if they encounter credit troubles. Their discussions with friends and money management advisers provided expanded knowledge of credit counseling and bankruptcy alternatives.
Life Situation Financial Data
Recently Married
Pam, 26
Josh, 28
Renting an Apartment Monthly income \$5,840
Living expenses \$3,900
Assets \$13,500
Liabilities \$4,800
Emergency fund \$1,000

Q1. What is the minimum amount that the Turner should have in an emergency fund? What actions might be taken to increase the amount in this fund?

1. Lucy lacks cash to pay for a \$720 dishwasher. She could buy it from the store on credit by making 12 monthly payments of \$65. The total cost would then be \$780. Instead, Lucy decides to deposit \$60 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved \$770.40—\$720 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs \$849.60. Its price has gone up 18 percent, the current rate of inflation.
From the financial standpoint, was postponing her purchase a good trade-off for Lucy?

Yes ___
No ___

2. Malou is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Malou is living at home and works in a shoe store, earning a gross income of \$3250 per month. Her employer deducts a total of \$150 for taxes from her monthly pay. Malou also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$140 per month.
Calculate her debt payments-to-income ratio without college loan. Remember to convert your answer to a percentage!

3. Sally is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Sally is living at home and works in a shoe store, earning a gross income of \$2990 per month. Her employer deducts a total of \$200 for taxes from her monthly pay. Sally also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$100 per month.
Calculate her debt payments-to-income ratio with college loan. Don't forget to convert your answer to a percentage.