What is contribution margin? How does it differ from an operating leverage? Discuss, with an example, how contribution margin is used to determine a break-even quantity?

Exercise 3.21 DISCOUNTED PAYBACK

Your company is considering a high-risk project that could yield strong revenues but will involve a significant up-front investment. Because of this risk, top management is naturally concerned about how long it is likely to take to pay off that investment so that they can begin to realize profits. This project will require an investment of $200,000 and your five-year projection for inflows is: Year 1 – $50,000, Year 2 – $75,000, Year 3 – $125,000, Year 4 – $200,000, and Year 5 – $250,000. Your firm’s required rate of return is 18%. How long will it take to pay back your initial investment?

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Calculate the value of a bond that matures in 13 years and has a $1,000 par value. The annual coupon interest rate is 9 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 11 percent. The value of the bond is

Festus and Fran have decided to buy a house. The purchase price is $175,000. They have saved $25,000 for a down payment. The amount to be financed is $150,000. Consider the following two loan options for Festus and Fran:

I. Borrow $150,000 for 15 years (180 months) at 4% APR. What will the monthly payment be? How much total interest will Festus and Fran have to pay over the term of the loan?

II. Borrow $150,000 for 30 years (360 months) at 4.6% APR. What will the monthly payment be? How much total interest will Festus and Fran have to pay over the term of the loan?

If Festus and Fran intend to live in the house for 5-10 years, what advice do you have for Festus and Fran regarding their choice of loans? (You may want to consider looking up an amortization schedule for each before providing any advice.)

Financing Deficit

Stevens Textile Corporation's 2018 financial statements are shown below:

Balance Sheet as of December 31, 2018 (Thousands of Dollars)

Income Statement for January 1 - December 31, 2018 (Thousands of Dollars)

1. Suppose 2019 sales are projected to increase by 15% over 2018 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2019. The interest rate on all debt is 9%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2018, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Do not round intermediate calculations. Round your answers to the nearest dollar.
   Total assets: $   
   AFN: $   
2. 
   
3. What is the resulting total forecasted amount of the line of credit? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $  
4. 
   
5. In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2019 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?
   If debt is added throughout the year rather than only at the end of the year, interest expense will be -Select-higherlowerItem 4 than in the projections of part a. This would cause net income to be -Select-higherlowerItem 5 , the addition to retained earnings to be -Select-higherlowerItem 6 , and the AFN to be -Select-higherlowerItem 7 . Thus, you would have to -Select-add insubtract fromItem 8 new debt.

Maggie's Muffins Bakery generated $4 million in sales during 2018, and its year-end total assets were $3 million. Also, at year-end 2018, current liabilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2019, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 4%, and its payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Do not round intermediate calculations. Round the monetary value to the nearest dollar and percentage value to the nearest whole number.

Sales can increase by $   , that is by   %.

Broussard Skateboard's sales are expected to increase by 20% from $7.0 million in 2018 to $8.40 million in 2019. Its assets totaled $5 million at the end of 2018.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 5%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$  

Why is this AFN different from the one when the company pays dividends?
I. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.
II. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.
III. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
V. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.

Broussard Skateboard's sales are expected to increase by 15% from $8.6 million in 2018 to $9.89 million in 2019. Its assets totaled $6 million at the end of 2018.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout ratio is 60%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
$  

Assume that the company's year-end 2018 assets had been $7 million. Is the company's "capital intensity" ratio the same or different?

The capital intensity ratio is measured as A₀*/S₀. Broussard's current capital intensity ratio is -Select-higher than, lower than,equal to. Item 2 that of the firm with $7 million year-end 2018 assets; therefore, Broussard is -Select-less,more,the same. Item 3 capital intensive - it would require -Select-a smaller,a larger,the same. Item 4 increase in total assets to support the increase in sales.

According to Markowitz' Portfolio theory (1952), only market risk should earn a risk premium as idiosyncratic risk can be diversified away. However, newer studies has shown that idiosyncratic risk is priced (Merton, 1987) (Fu, 2009). If idiosyncratic volatility is priced, how can you exploit this fact?

Use the information below to calculate the ask cross rate between C$ and € in the "C$/€ " format.

Answer Format: Keep four decimals; use the price currency as the unit. Example:  4.1234(C$) or 4.1234(€)

You are graduating today. Your plan is to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years and $15,000 a year for the following 6 years. You will make your first deposit one year from today. In addition, your grandfather just gave you a graduation gift of $25,000 which you will deposit immediately. If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

This problem is worth up to 7 points. You will receive 2 "extra credit" points if you solve the entire problem correctly.

Provide all supporting calculations. Write your final answer as a complete sentence.

Provide examples of 'phygital' and evaluate how banks are implementing them.