Cap Budgeting

Matt DePonte

Mr. Teague

Capital Budgeting

March 3, 2015

Chapter 15

1. A

3. C

5. A

7. B

9. C

11. Return on equity measures a company's profit as a percentage of the combined total worth of all ownership interests in the company.

Return on capital essentially is the same formula as return on equity, but with the addition of one component. Return on capital, in addition to using the value of ownership interests in a company, also includes the total value of debts owed by the company in the form of loans and bonds.

13. If the number of units produced and sold change, the operating leverage will change as well.

15. The units produced and sold at which the operating profit is zero.

17. A. = 50,000*(0.5-0.2) / [50,000*(0.5-0.2) – 5,000]

= 15,000 / 10,000 = 1.5

B. = 50,000*(0.5-0.2) – 5,000 / [50,000*(0.5-0.2) – 5,000 – 3,000]

= 10,000 / 7,000 = 1.43

C. = 50,000*(0.5-0.2) / [50,000*(0.5-0.2) – 5,000 – 3,000]

= 15,000 / 7,000 = 2.14

19.

Company | Operating Earnings | Contribution Margin | Break-even | DOL | DFL | DTL |

A | 14,000 | 5 | 200 | 1.08 | 0.94 | 1.09 |

B | 150,000 | 4 | 2500 | 1.07 | 0.95 | 1.08 |

C | 90,000 | 1 | 10000 | 1.13 | 0.90 | 1.13 |

D | 8,000 | 40 | 100 | 2.00 | 0.54 | 2.16 |

E | 6,000 | 5 | 800 | 3.00 | 0.50 | 6.00 |

F | 255,000 | 5 | 4000 | 1.09 | 0.94 | 1.09 |

G | 92,000 | 5 | 1600 | 110 | 0.92 | 1.10 |

21. Earning = 15% *(150,000 + 600,000) = 112,500

NI = 112.500 – 15,000*(1 - 40%)*0.1 = 103,500

Slope = DFL = Earning/NI = 112,500/103,500 = 1.09

Intercept = 0

23. 1. A world without taxes or costs of financial distress

2. A world with taxes, but no costs of financial distress

3. A world with taxes and costs of financial distress

25. A. = 558,000

B. = 22,200

C. = 24,960

27. Taking on more debt, relative to equity, will increase the value of the company to a point, after which the costs of financial distress will offset...