35. ABC Company currently sells 40,000 units of product X each year. Each unitcosts P168 to produce and sells for P200. Fixed costs are P600,000 per year. Thefirm has annual interest expense of P120,000 preferred stock dividends ofP42,000 per year, and a 30% tax rate. The degree of TOTAL leverage for LDMCompany is [round off to 2 decimal places] 37. The earnings, dividends, and stock price of ABC, Inc. are expected to grow at7 percent per year after this year. Its common stock sells for P23 per share, itslast dividend was P2.00 and will pay P2.14 at the end of the current year. It shouldpay P2.50 flotation cost. If the firm's beta is 1.75, the risk-free rate is 8 percent,and the average return on the market is 12 percent, what will be the firm's cost ofequity using the CAPM approach? [nearest %]

Hi student Since there are multiple questions, we will answer only first question.

35. ABC Company currently sells 40,000 units of product X each year. Each unit costs P168 to produce and sells for P200. Fixed costs are P600,000 per year. The firm has annual interest expense of P120,000 preferred stock dividends of P42,000 per year, and a 30% tax rate. The degree of TOTAL leverage for LDM Company is [round off to 2 decimal places]

35. ABC Company currently sells 40,000 units of product X each year. Each unit costs P168 to produce and sells for P200. Fixed costs are P600,000 per year. The firm has annual interest expense of P120,000 preferred stock dividends of P42,000 per year, and a 30% tax rate. The degree of TOTAL leverage for LDM Company is [round off to 2 decimal places]

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter16: Financial Planning And Control

Section: Chapter Questions

Problem 19PROB

See similar textbooks

Similar questions

It is December 31. Last year, Campbell Construction had sales of $80,000,000, and it forecasts that next year’s sales will be $76,000,000. Its fixed costs have been—and are expected to continue to be—$40,000,000, and its variable cost ratio is 21.00%. Campbell’s capital structure consists of a $15 million bank loan, on which it pays an interest rate of 8%, and 750,000 shares of common equity. The company’s profits are taxed at a marginal rate of 40%. The following are the two principal equations that can be used to calculate a firm’s DFL value: DFL (at EBIT = $X)=Percentage Change in EPSPercentage Change in EBITDFL (at EBIT = $X)=Percentage Change in EPSPercentage Change in EBIT DFL (at EBIT = $X)=EBITEBIT−Interest−Preferred Dividends(1 – Tax Rate)DFL (at EBIT = $X)=EBITEBIT−Interest−Preferred Dividends(1 – Tax Rate) Given this infromation, complete the following sentences: • The company’s percentage change in EBIT is ______(-12.26%/ -16.34%/ -13.62%)    . • The percentage change…
The Hurricane Lamp Company forecasts that next year’s sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at 12 percent interest. It has 20,000 shares of $2.5 preferred stock and 40,000 shares of common stock outstanding. Hurricane Lamp is in the 40 percent corporate income tax bracket. Forecast Hurricane Lamp’s earnings per share (EPS) for next year. Develop a complete income statement using the revised format illustrated in Table 14.1. Then determine what Hurricane Lamp’s EPS would be if sales were 12 percent above the projected $6 million level. Round your answers to the nearest cent.EPS1: $   EPS2: $   Calculate Hurricane Lamp’s degree of operating leverage (DOL) at a sales level of $6 million using the following formulas. The definitional formula (Equation 14.1). Round your answer to three decimal places. The simpler,…
Aruz Berhad sells its product at RM45 per unit. Fixed cost per year is RM220,000 while variable cost is RM15 per unit. The firm has debt capital of RM450,000 and its interest rate is 7%. Firm tax rate is 30% and the total number of shares issued is 300,000 units. You are required to: Calculate earnings before interest and tax (EBIT) and earnings per share (EPS) at total sales of 15,000 units.                    Calculate the degree of financial leverage at sales level of 15,000 units.
Yor Inc. most recently sold 200,000 units at P12.00 each; its variable operating costs are P9.00 per unit, and its fixed operating costs are P400,000. Annual interest charges total P75,000, and the firm has 1,000 shares of P10 (annual dividend) preferred stock outstanding. It currently has 5,000 shares of common stock outstanding. Assume that the firm is subject to a 25% tax rate. Questions: At what level of sales (in units) would the firm break even on operations? (Round off final answer to the nearest peso) Calculate the firm’s earnings per share (EPS) in tabular form at the current level of sales. (Round off final answer to the nearest centavo or two decimal places) Calculate the firm’s earnings per share (EPS) in tabular form at a 220,000-unit sales level. (Round off final answer to the nearest centavo or two decimal places) Using the current P2,400,000 level of sales as a base, calculate the firm’s degree of operating leverage (DOL). (Round off final answer to the nearest two…
McMichael, Inc has expected sales of $40 million. Fixed operating cost is $5 million and the variable cost ratio is 65 percent. They have outstanding debt of $10 million at an interest rate of 10 percent and $3million in a 12 percent bond. McMichael has 250,000 shares of preferred stock with a $10 dividend and 1 million shares of outstanding common stock. Their average tax rate is 35% and marginal tax rate is 40%. What is the company’s DOL at its current sales level. What is their current DFL? Forecast McMichael’s EPS if sales drop to $38 million.
Full Boat Manufacturing has projected sales of $124.5 million next year. Costs are expected to be $74.4 million and net investment is expected to be $15.05 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 percent, where it is expected to remain indefinitely. There are 6.6 million shares of stock outstanding and investors require a return of 13 percent return on the company’s stock. The corporate tax rate is 24 percent. a. What is your estimate of the current stock price? b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 11. What is your new estimate of the company’s stock price?
Hong Sdn Bhd makes a patented rubber tapping machine that sells for RM6. Each machine has a variable operating cost of RM3. Fixed operating costs are RM60,000 per year and the company pays RM12,000 in interest and preferred dividend of RM6,000 per year. Currently, the company is selling 30,000 machines per year and is taxed at a rate of 40 %. d. Calculate the company’s degree of operating leverage ( DOL), degree of financial leverage ( DFL) and degree of total leverage ( DTL). Comment on your findings
Hong Sdn Bhd makes a patented rubber tapping machine that sells for RM6. Each machine has a variable operating cost of RM3. Fixed operating costs are RM60,000 per year, and the company pays RM12,000 in interest and preferred dividend of RM6,000 per year. Currently, the company is selling 30,000 machines per year and is taxed at a rate of 40 %. What is the meaning of the term leverage? Discuss operating, financial and total leverage and the relationships among them. What is Hong Sdn Bhd’s operating breakeven point, EBIT and earnings available for ordinary shares? Calculate the company’s degree of operating leverage ( DOL), degree of financial leverage ( DFL) and degree of total leverage ( DTL). Comment on your findings
Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%. What is the breakeven point in dollars for the firm?
Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000,and its tax rate is 40 percent. Vapor Lock’s beta is 1.5.a. What is Vapor Lock’s DFL?b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentageincrease in net income?c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resultingnet income?
Hebner Housing Corporation has forecast the following numbers for this upcoming year: Sales = $1,000,000. Cost of goods sold = 600,000. Interest expense = 100,000. Net income = 180,000.The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. That is, if the company’s sales were to increase to $1.5 million, its cost of goods sold would increase to $900,000. The company’s CEO is unhappy with the forecast and wants the firm to achieve a net income equal to $240,000. In order to achieve this level of net income, what level of sales will the company have to achieve? Assume that Hebner’s interest expense remains constant.