Reference no: EM132980045

Questions -

Q1. The following relationships exist for Cybo Industries, a manufacturer of electronic components. Each unit of output is sold for $45; the fixed costs are $175,000; variable costs are $20 per unit.

a. What is the firm's gain or loss at sales of 5,000 units? Of 12,000 units?

b. What is the breakeven point?

Q2. Aed Corporation has fixed costs of $100,000 and variable costs that are 70 percent of the current sales price of $20. Aed sells 30,000 units at this price. Aed can increase sales by 10,000 units by cutting its unit price to $15, but variable cost per unit won't change. Should it cut its price?

3. The NDBA Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, NBA would have 200 shares of stock outstanding. Under Plan II, NDBA would have 100 shares of stock and $5,000 in debt outstanding. The interest rate is 12 percent and there are no taxes.

a. If EBIT is $1,000, which plan results in the higher EPS?

b. If EBIT is $2,000, which plan results in the higher EPS?

c. What is the break-even EBIT; that is, what EBIT generates exactly the same EPS under both plans?

Q4. Eolop company now has an investment plan which needs $5m. The company has two financing proposals. Plan A is to borrow $2m at 10% and $3m will need to sell stocks at $50 per common share. Plan B would involve a higher financial leverage. $1m would be raised by selling bonds with an effective interest rate of 10% and the remaining $4 million would be raised by selling common stock at the $50 price per share. The fixed operating cost will be $800,000. The corporate tax rate is 40%.

a. Find the EBIT indifference level associated with the two financing plans.

b. Prepare an analytical EBIT-EPS analysis chart for this situation.

c. If a detailed financial analysis project that long-term EBIT will be in the range of $0.8m to $1m annually, which plan will generate higher EPS?

d. Please calculate DOL, DFL and DCL at the point of EBIT being $1 million under plan B.

e. Please describe the meaning of DOL, DFL and DCL.