Reference no: EM13927279

1. The current price per unit for shock absorbers produced by Leveland Products is $25. The variable cost per unit is $10. Fixed costs are $600,000.

a. What is the breakeven point in units?

b. What is the DOL at the breakeven point? Explain what this value means conceptually.

2. The Covington Engine Company is considering opening a new plant facility to build truck engines. As part of a detailed analysis of the proposed facility, Covington's management wants some information on the cash breakeven point. Fixed costs for the facility are expected to be $6 million a year, including depreciation expenses of $800,000 a year. The engines' sales price is expected to be $7,000 per unit, and the variable cost is expected to be $3,000 per unit. Calculate the expected annual cash breakeven point and the expected annual cash breakeven sales policy. Under these conditions, dividend policy does not affect the value of the firm. After the MM assumptions are removed, dividend policy may affect firm value because of

1. Risk-averse behavior of investors

2. Shareholder transaction costs

3. Personal taxes

4. Issuance costs

5. Agency costs

¦ A firm may employ any one of a number of alternative dividend policies, including the following:

1. The passive residual approach

2. The stable dollar dividend approach

3. The constant payout ratio approach

4. The policy of paying a small, regular dividend plus year-end extras

Ample evidence indicates that many firms favor a stable dollar dividend policy.

¦ Stock dividends are sometimes used in lieu of (and in conjunction with) cash dividends. The net effect of stock dividends is to leave the total book value of the firm unchanged while increasing the number of shares outstanding and broadening the ownership base.

¦ Some firms employ share repurchase plans in lieu of (or in addition to) cash dividends. Stock repurchases convert shareholder benefits from ordinary income (dividends) to capital gains income. Theoretically, ignoring taxes, transaction costs, and other market imperfections, share repurchases should have the same effect on shareholder wealth as the payment of cash dividends. However, possibly due to tax considerations (that is, lower tax rates on capital gains income than on dividends and the ability to defer taxes on capital gains income) and signaling effects, share repurchases (via tender offers) are observed to have a positive effect on shareholder wealth.