16-11 Mercury Air’s debt consists of $50,000 in accounts payable, $100,000 in 10 percent notes payable....

16-11

Mercury Air’s debt consists of $50,000 in accounts payable, $100,000 in 10 percent notes payable. And $240,000 in 8 percent bonds. Mercury has no preferred stock. If its marginal tax rate is 35 percent, what is Mercury’s financial breakeven point?

16-14

Stumpy’s Gator Farm forecasts that its net income will be $46,800 this year. The firm’s marginal tax rate is 35 percent, and it must pay $36,000 interest on outstanding debt. Stumpy’s has no preferred stock. What is the firm’s degree of financial leverage (DFL)?

Solutions

Expert Solution

16-11

Notes payable = $100000 , Interest expense on notes payable = Notes payable x interest rate = $100000 x 10% = 10000

Bonds = 2400000, Interest expense on bonds = Bonds x interest rate = $240000 x 8% = 19200

No interest is paid on accounts payable as it is not interest bearing debt.

Total interest expense = I = Interest expense on notes payable + Interest expense on bonds = 10000 + 19200 = 29200

As there is no preferred stock, hence preferred dividends = D_p = 0

We know that

Financial breakeven point is level of EBIT for which EPS is equal to zero.

Financial Breakeven point = I + [D_p / (1- tax rate)] = 29200 + [ 0 / (1-35%)] = 29200 + 0 = 29200

Hence Financial Breakeven point = $29200

16-14

Net income = $46800, Tax rate = 35%

Net income = EBT(1-tax rate)

EBT = Net income / (1- tax rate ) = 46800 / (1-35%) = 46800 / 0.65 = 72000

Now we know that

EBIT = EBT + Interest = 72000 + 36000 = 108000

Degree of financial leverage = EBIT / EBT = 108000 / 72000 = 1.5

Hence Degree of financial leverage = 1.5

jeff jeffy answered 2 days ago

Next > < Previous

Related Solutions

Assume the following: Cash, $100,000; Accounts Receivable, $50,000; Accounts Payable, $50,000; Supplies, $40,000; Equipment, $100,000; Land,...

Assume the following: Cash, $100,000; Accounts Receivable, $50,000; Accounts Payable, $50,000; Supplies, $40,000; Equipment, $100,000; Land, $500,000; Bonds Payable, $1,000,000; Mortgage Payable, $400,000; Inventory, $100,000. Compute both the current and quick ratios. What conclusions can you draw from this data ?

Cash $ 10,000 Accounts payable $ 30,000 Receivables 50,000 Notes payable 20,000 Inventories 150,000 Total current liabilities $ 50,000...

Cash $ 10,000 Accounts payable $ 30,000 Receivables 50,000 Notes payable 20,000 Inventories 150,000 Total current liabilities $ 50,000 Total current assets $ 210,000 Long-term debt 50,000 Net Fixed assets 90,000 Common equity 200,000 Total assets $ 300,000 Total liabilities and equity $ 300,000 Net Sales 200,000 Net income 15,000 Lloyd Inc. Has sales of $200,000, a net income of $15,000 (balance sheet posted above). The new owner thinks that inventories are excessive and can be lowered to the point where the current...

CASE 11‐2 Debt Restructuring Whiley Company issued a $100,000, five‐year, 10 percent note to Security Company...

CASE 11‐2 Debt Restructuring Whiley Company issued a $100,000, five‐year, 10 percent note to Security Company on January 2, 2016. Interest was to be paid annually each December 31. The stated rate of interest reflected the market rate of interest on similar notes. Whiley made the first interest payment on December 31, 2016. Owing to financial difficulties, the firm was unable to pay any interest on December 31, 2017. Security Co. agreed to the following terms: The $100,000 principal would...

Cork price: 16 10 15 10 17 11 14 13 11 14 11 16 18 16...

Cork price: 16 10 15 10 17 11 14 13 11 14 11 16 18 16 10 17 14 14 16 7 10 12 19 15 16 14 9 12 21 13 10 16 12 16 13 17 17 13 14 18 11 12 15 16 13 18 16 17 12 12 14 9 11 14 19 13 11 17 11 13 15 14 18 18 18 12 10 11 13 14 11 14 18 13 13 19 17 14...

Cork price 16 10 15 10 17 11 14 13 11 14 11 16 18 16...

Cork price 16 10 15 10 17 11 14 13 11 14 11 16 18 16 10 17 14 14 16 7 10 12 19 15 16 14 9 12 21 13 10 16 12 16 13 17 17 13 14 18 11 12 15 16 13 18 16 17 12 12 14 9 11 14 19 13 11 17 11 13 15 14 18 18 18 12 10 11 13 14 11 14 18 13 13 19 17 14...

Asset Liabilities and owners equity Cash 600 Accounts Payable 700 Inventory 80 Notes Payable 200 Accounts...

Asset Liabilities and owners equity Cash 600 Accounts Payable 700 Inventory 80 Notes Payable 200 Accounts Receivable 400 Current Maturing LTD 40 Fixed assets 1500 Stock 1300 Accumulated Depreciation (90) Retained Earnings 250 Total 2490 Total 2490 Use the following balance sheet for Delta Company to answer the following 3 questions. 1.Which of the following statements is accurate in regards to Delta's financial position? Delta's NWC suggests that solvency is a concern. Delta's NWC suggests that the firm has a...

Debt Restructuring Sectron Co. has a note payable of $480,000 with a 10 percent interest rate...

Debt Restructuring Sectron Co. has a note payable of $480,000 with a 10 percent interest rate due to Prime First Trust on january 1, 2005. Sectron Co. recently experienced financial hardship due to slow sales in the appliance industry. Sectron restructured the note with Prime First Trust, reducing the principal to $400,000, and interest rate to 8 percent, in addition to extending the maturity by three years. 1. Calculate the gain, or loss to Prime First Trust and Sectron CO.,...

Assets Liabilities & Owners’ Equity Cash $500,000 Accounts Payable 0 Accounts Receivable $550,000 Notes Payable $600,000 Inventory...

Assets Liabilities & Owners’ Equity Cash $500,000 Accounts Payable 0 Accounts Receivable $550,000 Notes Payable $600,000 Inventory $750,000 Accruals $400,000 Total Current Assets $1,800,000 Total Current Liabilities 1,000,000 Net Plant & Equip $6,200,000 Long-Term Debt $4,000,000 Total Debt $5,000,000 Retained Earnings $1,500,000 Stockholders’ Equity $1,500,000 Total Equity 3,000,000 Total Assets $8,000,000 Total Liabilities & Owners’ Equity $8,000,000 You currently work for Capital One Financial. The firm is interested in pursuing a new banking project, but they are unsure of where and...

Insurance Expense $12,000 Accounts Receivable $10,000 Cash 37,000 Notes Payable 15,000 Accounts Payable 13,000 Willis, Capital,...

Insurance Expense $12,000 Accounts Receivable $10,000 Cash 37,000 Notes Payable 15,000 Accounts Payable 13,000 Willis, Capital, Dec. 31, 2018 ? Advertising Expense 2,000 Salaries Expense 21,000 Service Revenue 125,000 Equipment 105,000 Willis, Withdrawals 9,000 Owner contribution 25,000 PrintDone Accent PhotographyAccent Photography works weddings and prom-type parties. The balance of WillisWillis, Capital was $ 18 comma 000$18,000 at DecemberDecember 3131, 20172017. At DecemberDecember 3131, 20182018, the business's accounting records show these balances: LOADING... (Click the icon to view the accounts.) Prepare...

Liabilities include all of the following except: Accounts Payable. Prepaid Insurance. Unearned Revenue. Notes Payable.

Subjects