Grand Canyon FIn450 module 3 assignemnt-p 13-2 13-16 13-22 and 13-26

Breakeven comparisons: Algebraic Given the price and cost data shown in the accompanying

table for each of the three firms, F, G, and H, answer the questions

that follow.

a. What is the operating breakeven point in units for each firm?

b. How would you rank these firms in terms of their risk?

Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per

unit, variable operating costs of $1.70 per unit, and fixed operating costs of

$6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50

per unit, variable operating costs of $1.00 per unit, and fixed operating costs of

$62,500. Interest is $17,500 per year. Assume that both firms are in the 40% tax

bracket.

a. Compute the degree of operating, financial, and total leverage for firm R.

b. Compute the degree of operating, financial, and total leverage for firm W.

c. Compare the relative risks of the two firms.

d. Discuss the principles of leverage that your answers illustrate.

EBIT–EPS and capital structure Data-Check is considering two capital structures.

The key information is shown in the following table. Assume a 40% tax rate.

a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any

two EBIT values and finding their associated EPS values.

b. Plot the two capital structures on a set of EBIT–EPS axes.

c. Indicate over what EBIT range, if any, each structure is preferred.

d. Discuss the leverage and risk aspects of each structure.

e. If the firm is fairly certain that its EBIT will exceed $75,000, which structure

would you recommend? Why?

Integrative: Optimal capital structure The board of directors of Morales Publishing,

Inc., has commissioned a capital structure study. The company has total assets of

$40,000,000. It has earnings before interest and taxes of $8,000,000 and is taxed at

a rate of 40%.

a. Create a spreadsheet like the one in Table 13.10 showing values of debt and equity

as well as the total number of shares, assuming a book value of $25 per

share.

b. Given the before-tax cost of debt at various levels of indebtedness, calculate the

yearly interest expenses.

c. Using EBIT of $8,000,000, a 40% tax rate, and the information developed in

parts a and b, calculate the most likely earnings per share for the firm at various

levels of indebtedness. Mark the level of indebtedness that maximizes EPS.

d. Using the EPS developed in part c, the estimates of required return, rs, and Equation

13.12, estimate the value per share at various levels of indebtedness. Mark

the level of indebtedness in the following table that results in the maximum price

per share, P0.

e. Prepare a recommendation to the board of directors of Morales Publishing that

specifies the degree of indebtedness that will accomplish the firm’s goal of optimizing

shareholder wealth. Use your findings in parts a through d to justify your

recommendation.