Breakeven and leverage, What would be WCC's EPS (1) under

Breakeven and leverage

Assignment Help Financial Management

Reference no: EM131598090

Breakeven and leverage

Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $29.00 per set, and this year's sales are expected to be 440,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,500,000, and fixed production (operating) costs at present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 7%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and WCC is in the 40% federal-plus-state tax bracket.

The company is considering investing $7,200,000 in new equipment. Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,560,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share.

What would be WCC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock? Do not round intermediate calculations. Round your answers to the nearest cent.

1. $

2. $

3. $

At what unit sales level would WCC have the same EPS, assuming it undertakes the investment and finances it with debt or with stock? {Hint: V = variable cost per unit = $8,400,000/440,000, and EPS = [(PQ - VQ - F - I)(1 - T)]/N. Set EPSStock = EPSDebt and solve for Q.} Do not round intermediate calculations. Round your answer to the nearest whole.

units

At what unit sales level would EPS = 0 under the three production/financing setups - that is, under the old plan, the new plan with debt financing, and the new plan with stock financing? (Hint: Note that VOld = $10,500,000/440,000, and use the hints for part b, setting the EPS equation equal to zero.) Do not round intermediate calculations. Round your answers to the nearest whole.

Old plan units

New plan with debt financing units

New plan with stock financing units

On the basis of the analysis in parts a through c, and given that operating leverage is lower under the new setup, which plan is the riskiest, which has the highest expected EPS, and which would you recommend? Assume here that there is a fairly high probability of sales falling as low as 250,000 units, and determine EPSDebt and EPSStock at that sales level to help assess the riskiness of the two financing plans. Do not round intermediate calculations. Round your answers to two decimal places. Negative amount should be indicated by a minus sign.

EPSDebt = $

EPSStock = $

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Reference no: EM131598090

Questions Cloud

Management action and stock value : REH? Corporation's most recent dividend was $1.93 per? share, Do? nothing, which will leave the key financial variables unchanged.

What are the best goals for the fed : What are the best goals for the Fed? Why? How does the structure of the Fed insulate monetary policy decision makers from political pressure?

Company makes all sales of products and services : USA Tech company makes all sales of products and services in U.S. dollars.

Risks for the macro-economy : If a bank fails, what are the risks for the macro-economy that do not exist for other businesses?

Breakeven and leverage : What would be WCC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock?

Describes the training and a concise statement : Write 2-3 sentences that describes the training and a concise statement of the overall purpose of the training. Design worksheet which is Attached to design.

Demonstrate our ability to control strings : Demonstrate our ability to control strings and use methods - which appends an exclamation point to the end of a string

Define the unlevered beta : Hartman Motors has $8 million in assets, which were financed with $1.6 million of debt and $6.4 million in equity.

Discuss ryan white care act with the affordable care act : HIV/AIDS has affected millions of people in the United States and the world since the 1980s. On a global scale, large numbers of people with HIV/AIDS.

User Account

All Pages