Variable Cost and Capital Structure

d) Break even sales change that would change the profits by the same amount as a reduction in price.

1. Using the current ratio, discuss what conclusions you can make about each company’s ability to pay current liabilities (debt).

3. Was the firm able to generate enough cash from operations to pay for all of its capital expenditures?

Leveraging the company would affect taxes because interest is tax deductible. Therefore, the more debt American Home Produces takes on, the less the company will have to pay in taxes. Also, when leveraging up there is tax savings the company will receive due to the interest tax shield.

b) If Olin issues $40 mm in debt to repurchase 2 million shares of equity (i.e. they replace $40 mm of equity with $40 mm of debt in their capital structure), and the interest rate on the debt is 10%, what will be the expected EPS next year?

PROBLEM 5-1. Variable and Full Costing: Sales Constant but Production Fluctuates [LO 1, 2, 3, 5] Spencer Electronics produces a wireless home lighting device that allows consumers to turn on home lights from their cars and light a safe path into and through their homes. Information on the first three years of business is as follows: 2011 Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit 15,000 15,000 $750,000 $ 150 $ 250 2012 15,000 20,000 $750,000 $ 150 $ 250 $220,000 2013 15,000 10,000 $750,000 $ 150 $ 250 $220,000 Total 45,000 45,000

a. We were already lagging behind the market to begin with. Unless we give an increase in the basic

Based on your analysis above, make at least two (2) recommendations as to how each company could improve its working capital positions. Provide support for your recommendations.

7. Which of the following must be true if a firm is experiencing economies of scale?

The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s

In Scenario A, the Debt would remain at 0 for good. This results in a D/V ratio of 0 which gives us a WACC of 9.21. Using the WACC to derive the Enterprise value of the company, it is found to be $3.043B. Subtracting the debt of $1.25B, we have a Value of Equity of $1.79B. Subtracting the $765M that is

3. The article is about background and arguments about whether to raising debt or equity.

b. The company may be able to avoid bankruptcy but it will be hard. They will need to do several things.

B) Division managers are padding cost estimates so as to show short-term efficiency gains when the

EPS, DPS and ROE increase when the company uses debt as the number of shares decrease and earnings available to shareholders and bondholders increases due to tax shield. Assuming constant P/E ratio, stock price also increase compared with no debt. Assuming constant dividend yield, stock price also increase when the company use debt. EPS and DPS are maximized when the company maintains debt-to-capital at 40%.