Essay regarding Capital Framework and Net Operating Salary Study Information

Ch. 14 (Problems and Solutions)

36. Net operating profits

The Congress Organization has discovered two techniques for producing homemade cards. One method consists of using a machine having a set cost of $10, 000 and variable costs of $1. 00 every deck of cards. The other approach would use a less expensive equipment (fixed expense = $5, 000), but it would require greater varying costs ($1. 50 every deck of cards). In case the selling price every deck of cards will be the same under each method, at what level of outcome will the two methods develop the same net operating profits?

a. a few, 000 decks

b. 15, 000 products

c. 15, 000 units

d. 20, 000 decks

e. 25, 000 decks

36. Solution: b Diff: M

Total costMethod one particular = $1. 00(Q) & $10, 000.

Total costMethod 2 sama dengan $1. 50(Q) + $5, 000.

Established equal and solve for Q:

Q + $10,50, 000 sama dengan $1. 50(Q) + $5, 000

$5, 000 sama dengan $0. 5(Q)

10, 500 = Queen.

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forty one. Capital framework and share price Answer: c Difference: M

The following information relates to Lott Businesses:

Functioning income (EBIT) $300, 000Shares outstanding one hundred twenty, 000 Financial debt $100, 000EPS $1. forty five Interest price $ twelve, 000Stock value $17. 45 Tax rate 40%

The company is usually considering a recapitalization where it would concern $348, 000 worth of recent debt and use the proceeds to buy backside $348, 500 worth of common inventory. The buyback will be performed at the pre-recapitalization share selling price ($17. 40). The recapitalization is not expected to impact operating income or the duty rate. After the recapitalization, you can actually interest expenditure will be 50 dollars, 000.

Imagine the recapitalization has no influence on the company's cost earnings (P/E) ratio. Precisely what is the expected price from the company's stock following the recapitalization?

a. $15. 30

n. $17. seventy five

c. $18. 00

g. $19. 03

e. $20. 48

41. Answer: c Diff: M

We can try this problem utilizing the P/E before and after the recapitalization. Recall that P/E = Price/EPS.

Ahead of the recap. After recap. EBIT $300, 500 $300, 1000

Interest -10, 000 -50, 000

EBT $290, 000 $250, 1000

Tax (40%) 116, 1000 100, 500

NI $174, 000 $150, 000

Stocks 120, 1000 100, 000*

EPS $174, 000/120, 1000 = $1. 45. $150, 000/100, 1000 = $1. 50. PRICE TO EARNINGS $17. 40/1. 45 = 12(.

*120, 000 -- ($348, 000/$17. 40)

Since P/E = 12 following the recapitalization (recall the question claims that it does not change), we understand 12 sama dengan Price/$1. 40; Price sama dengan 12 Г— $1. 50 = $18. 00.

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44. Maximum capital composition and Hamada equation Response: d Difference: T D Aaron Athletics is trying to ascertain its ideal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company provides produced the subsequent table:

Debt-to-total-Equity-to-total-Debt-to-equity BondBefore-tax property ratio (wd)assets ratio (wc) ratio (D/E)ratingcost of financial debt

0. 75. 900. 10/0. 90 = 0. 11AA7. 0%

zero. 200. 800. 20/0. 70 = 0. 25A7. two

0. three hundred. 700. 30/0. 70 sama dengan 0. 43A8. 0

zero. 400. 600. 40/0. 62 = 0. 67BB8. eight

0. 500. 500. 50/0. 50 sama dengan 1 . 00B9. 6

You’re able to send tax level, T, is usually 40 percent.

The company uses the...

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