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# Financial risk / breakeven

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Please assist with the following questions. Please show work and calculations in Excel.
1)Ethier Enterprise has an unlevered beta of 1.25. Ethier is financed with 35% debt and has a levered beta of 1.35. If the risk free rate is 6% and the market risk premium is 7%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.

2)Schweser Satellites Inc. produces satellite earth stations that sell for \$95,000 each. The firm's fixed costs, F, are \$2.5 million, 50 earth stations are produced and sold each year, profits total \$600,000; and the firm's assets (all equity financed) are \$4 million. The firm estimates that it can change its production process, adding \$4 million to investment and \$420,000 to fixed operating costs. This change will (1) reduce variable costs per unit by \$10,000 and (2) increase output by 16 units, but (3) the sales price on all units will have to be lowered to \$80,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.
a. What is the incremental profit?
\$
To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round your answer to two decimal places.
%
Should the firm make the investment?

b. Would the firm's break-even point increase or decrease if it made the change?

c. Would the new situation expose the firm to more or less business risk than the old one?

I. The new situation would have less business risk than the old one.
II. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.
III. The new situation would have more business risk than the old one.

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#### Solution Summary

The solution explains some questions relating to financial risk and breakeven

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## Camping USA Inc: Analysis in Excel of financial risks, break even point, ratios

Camping USA Inc. has only been operating for 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and the owner and CEO, Tom Charles, has decided that this is the right time to know more about the business and financial risks his company must deal with. For this, the CFO has asked you to prepare an analysis to support him in his next meeting with Tom Charles a week from today. To make the required calculations, you have put together the following data regarding the cost structure of the company:

Output level
120,000 units

Operating assets
\$6,000,000

Operating asset turnover
12 times

Return on operating assets
48%

Degree of operating leverage
10 times

Interest expense
\$720,000

Tax rate
42%

The CFO has instructed you to first determine the break-even point in units of output for the company. He requires that you prepare supporting documents, which demonstrate how you arrived at your conclusion and can facilitate his review of your work. Accordingly, you are required to have the information needed to prepare an analytical income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CEO, you also need to prepare answers to the following questions:

* a. What is the firm's break-even point in sales dollars?
* b. If sales should increase by 40 percent, by what percentage would EBT (earnings before taxes) and net income increase?
* c. Prepare another income statement, this time to verify the calculations from part d.

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