Reference no: EM133117927

Question - Part A - After winning a reasonable amount from the lottery, you decided to fulfil your teen age dream. You are considering the possibility of opening your own specialized ice fishing specialty shop. You initial forecast indicates that the first-year sales will be $600,000, and your variable costs will be approximately 50% of sales. The fixed costs in the first year will be $250,000. In addition to your contribution , you are looking to raise $800,000

Currently you are considering two options of financing the dream:

Option 1 60% equity financing and 40% debt at 14%, or

Option 2 100% equity financing from friends and family. for $10 per share.

Part a - Compute his break-even point in dollars.

Part b - Calculate the Degree of Operating Leverage at the expected first-year sales volume

Part c - Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.

Part d - Explain the implications of your answers if the machine shop business is highly cyclic

Part B - Bob and Jim are both looking to purchase the same house that costs $500,000. Bob plans to make a 10% down payment and take a $450,000 mortgage for the rest of the payment (mortgage cost is 5% annually). Jim wants to purchase the house for $500,000 cash today.

Who will realize a higher return on investment if they sell the house for $550,000 a year from today? Show your calculations.