Assignment: Capital Structure Policy

Assignment: Capital Structure Policy

**Chapter 13, Pg 414-415 #s 10, 12, 15**

10.

a. = (20 * (1-0.65)) / ((20 * (1-0.65)) - 2.5) = 7 / (7 - 2.5) = 7 / 4.5 = 1.556

b. Degree of Financial Leverage = % Chg in EPS / % Chg in EBIT = 1.548 (Calculate EPS and EBIT for two different sales level to determine the % change in EPS and EBIT)

c. = {[15 - (15 * 0.65) - 2.5 - (12 * 0.08)] * [1 - 0.4] } / 1 = $1.07

12.

a. I. In units:

FC = $70,000; VC = $16; P = $30

Qb = $70,000/($30 - $16) = 5,000 copies

II. In dollar sales:

Sb = Qb x P = 5,000 x $30 = $150,000

b. [pic]

Slope of total revenue line is P = $30; Total revenue line originates from the origin (0,0).

Slope of total cost line is V = $16; Total cost line has a y-intercept of $70,000.

Breakeven units equal 5,000 copies at a total revenue level of $150,000.

c. Target profit = $21,000, Target volume = ($70,000 + $21,000)/($30 - $16) = 6,500 books

d.

Projected selling price $24.00

Variable costs per copy

Printing and binding $ 4.20

Administrative costs 1.60

Sales commissions 0.48*

Author's royalties 2.88*

Bookstore discounts 4.80*

Total $13.96

*These variable costs are reduced because they are a function of

the selling price.

Qb = $70,000 / ($24 - $13.96) = 6,972 copies

15.

a. CM = $5.5m - $2.2m = $3.3m

His fixed costs cannot exceed $2.3m, if he wants a profit of $1m.

b. B/E point = $2,300,000/60% = $3,833,333

**Chapter 14, Pg 439, #s 6, 8**

6. The EBIT-EPS analysis is used to compare EPS for different financing alternatives, determines which financing alternative maximizes EPS, and how EPS is related to how much each share earns. It is a way to measure profitability regardless of interest and taxes expenses.

8. When managers consider factors when setting a firm’s target capital structure it should depend on the capital requirement timing and the nature of the capital requirement. A factor to consider is to use more dept if it has...