EBIT—EPS and capital structure   ​Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 21% tax rate.

Source of capital    Structure A    Structure B

​Long-term debt    $98,000 at 15.6% coupon rate $196,000 at 16.6% coupon rate

Common stock 4,800 shares    2,400 shares

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 $72,000​, which structure would you​ recommend? Why? What if the tax rate was​ higher, say​ 40%?

a. Calculate two ​EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.

Complete the tables below using $50,000 and $60,000 ​EBIT:

You are attempting to value a call option with an exercise price of $108 and one year to expiration. The underlying stock pays no dividends, its current price is $108, and you believe it has a 50% chance of increasing to $133 and a 50% chance of decreasing to $83. The risk-free rate of interest is 9%. Calculate the call option’s value using the two-state stock price model.

The tax liability of RGV corporation with ordinary income of $ 110,000 is ________.

Range of taxable income                                       Marginal rate

                          $0     to       $50,000                           15%

                    50,000     to         75,000                            25

                    75,000     to       100,000                            34

                  100,000     to       335,000                            39

                  335,000     to   10,000,000                            34

              10,000,000     to   15,000,000                            35

              15,000,000     to   18,333,333                            38

                Over 18,333,333                                            35

A. 42,900

B. 26,150

C. 27,150

D. 28,150

What is the average tax rate for RGV corporation?

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1. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY.

A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.

B. Explain the importance of distinguishing between variable and fixed costs.

C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information.

1. Cost of goods sold of $35 per unit
2. Labor = $400/month
   • One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.
3. Advertising fees = $3,000
4. Bank fees = $200
5. Phone/internet = $150 per month
6. Shipping = $3 per unit
7. Utilities = $100 per month
8. Office Supplies = $900
1. Conference Exhibitor Fee = $3000
10. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

1. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)

You have just graduated from the MBA program of a large university, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the master’s program, your grandfather died and left you $1.5 million to do with as you please. You are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast-foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is 3 years. After 3 years you will go on to something else.

You have narrowed your selection down to two choices: (1) Franchise L, Lisa’s Soups, Salads & Stuff, and (2) Franchise S, Sam’s Fabulous Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the 3-year period. Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health-conscious, while Franchise S’s cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health-conscious and avoid fried foods. Franchise L serves breakfast and lunch whereas Franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: You could attract both the lunch and dinner crowds and the health-conscious and not- so-health-conscious crowds without the franchises directly competing against one another.

Here are the net cash flows (in thousands of dollars):

Franchise L:

Franchise S:

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.

You also have made subjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 12.5%. You must now determine whether one or both of the franchises should be accepted.

a.         (1) Define the term net present value (NPV). What is each franchise’s NPV?

(2) According to NPV, which franchise or franchises should be accepted if they are independent? Mutually exclusive?

(3) Would the NPVs change if the cost of capital changed to 10%?

b.         (1) Define the term internal rate of return (IRR). What is each franchise’s IRR?

(2) What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive?

(3) Would the franchises’ IRRs change if the cost of capital changed to 10%?

c.         (1) Draw NPV profiles for Franchises L and S. At what discount rate do the profiles cross?

(2) Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?

d.         Define the term modified IRR (MIRR). Find the MIRRs for Franchises L and S.

e.         What does the profitability index (PI) measure? What are the PIs of Franchises S and L?

f.          (1) What is the payback period? Find the paybacks for Franchises L and S.

(2) According to the payback criterion, which franchise or franchises should be accepted if the firm’s maximum acceptable payback is 2 years and if Franchises L and S are independent? If they are mutually exclusive?

(3) What is the discounted payback periods for Franchise L and S?

g.         In an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects, Project T (which lasts for 2 years) and Project F (which lasts for 4 years):

Expected Net Cash Flows:

Project T:

Project F:

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 10% cost of capital.

(1) What is each project’s initial NPV without replication?

(2) What is each project’s equivalent annual annuity?

(3) Apply the replacement chain approach to determine the projects’ extended NPVs. Which project should be chosen?

(4) Assume that the cost to replicate Project T in 2 years will increase by 5% due to inflation. How should the analysis be handled now, and which project should be chosen?

Let’s discuss the relationship between loanable funds and interest rates. What are the sources of loanable funds in the economy? How does the availability of loanable funds affect interest rates? What does this imply for the way in which the Fed manages the money supply?

A. While investigating the shares offered to you by your potential boss, you discover that the company you are considering working for is not registered as required under the Securities Act of 1933. How does this influence you as a potential employee and as a potential shareholder? Be sure to reference any applicable statutes or laws.

B. You know that accepting this job may eventually lead to a promotion into the role of the financial manager. As the potential financial manager, what federal and shareholder requirements would you need to be familiar with in order to ensure that you are being completely compliant?

What is the role of expectations in interest rate determination? How do expectations affect real and nominal interest rates? How and why do lenders make interest rate adjustments? How does this affect borrowers?

Problem #1​ ​The Pierced Ear, Inc. The Pierced Ear, Inc. has been solicited by an owner of five stores within the greater Los Angeles area who is contemplating the sale of his company and exploring the possibility of The Pierced Ear as a potential buyer. Listed below are the five stores and the sales volume for their most recent fiscal year: GLENDALE ​WEST SIDE ​ MONTEBELLO ​ FOX HILLS ​SHERMAN GALLERIA​PAVILION ​TOWN CENTER​ MALL ​OAKS ​$452,000 ​ $350,000 ​ $325,000​$365,000 ​ $311,000 The Pierced Ear feels that the annual sales volume most recently generated by the existing company is a basis for projecting its own sales. As a guideline, the merchandising department feels that there is a 40% probability that the stores will do last year's business....a 40% probability that they will do 5% more volume than last year...and lastly, a 20% probability that they will do 10% more volume than last year. Given the projected first year's sales volume (from above) that The Pierced Ear anticipates generating; it is projected that the sales will thereafter experience a compound annual growth rate of 3% per year until all leases expire. Each of the stores has 6 years left on their respective leases with no provision for renewing the leases at their intended expiry date. The Pierced Ear feels that each store will initially require a $50,000 remodeling cost immediately upon purchase of the stores, as well as an immediate required inventory investment of $50,000 in each of the five locations, with an additional amount of required inventory in the following year of $20,000 for each of the locations. The Pierced Ear estimates that the Gross Profit will approximate 60% of Sales and Total Operating Expenses are estimated at 44% of Sales. Aggregate depreciation, for all of the stores, (the provision of which, is already included in Operating Expenses), is estimated at $100,000 per year. The combined Federal and State marginal tax rate is 25%. The Pierced Ear, Inc. explores each potential location it opens through a "Net Present Value" analysis. The acquisition, if undertaken, will be all equity financed. Thus, as to its Cost of Equity Capital, The Pierced Ear utilizes an industry proxy of 18%. The owner of the five stores is seeking $650,000 for all the assets and rights of all of his five stores under the respective leases. It is assumed that The Pierced Ear could immediately sell off the present owner’s inventory (which has an estimated retail value of $150,000), for 50% of its original retail (disregard any tax considerations in connection with the salvage value of the seller’s inventory). The deal is essentially all five stores or nothing at all. With consideration to the above, should The Pierced Ear, Inc. undertake the acquisition? Does the deal make sense as it stands OR if it does not appear viable, what might you counter-propose to the seller? Please quantify the results of your recommendation(s). Note…because it is an all or nothing at all deal, there is no need to individualize each store, but to view the value of the proposal in its entirety.

XYZ has 9 million shares of stock outstanding. The current share price is $50, and the

book value per share is $6. The firm also has two bond issues outstanding. The first

bond issue has a face value of $70 million and an 8% annual coupon; it sells for 95% of

par. The second bond has a face value of $60 million and a 7% annual coupon; it sells for

97% of par. The first bond matures in 10 years, whereas the second matures in 5 years.

(a) What are XYZ’s capital structure weights on a book value basis?

(b) What are XYZ’s capital structure weights on a market value basis?

(c) Suppose the company’s stock has a beta of 1.5. The risk-free rate is 5% and the market

risk premium is 8%. What is the company’sWACC if the tax rate is 30%?

The Warren Watch Company sells watches for $24, fixed costs are $120,000, and variable costs are $12 per watch.

1. What is the firm's gain or loss at sales of 8,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
   
   What is the firm's gain or loss at sales of 16,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
2. 
   
3. What is the break-even point (unit sales)? Round your answer to the nearest whole number.
   units
4. 
   
5. What would happen to the break-even point if the selling price was raised to $35?
   -Select-The result is that the break-even point is higher.The result is that the break-even point remains unchanged.The result is that the break-even point is lower.
6. 
   
7. What would happen to the break-even point if the selling price was raised to $35 but variable costs rose to $28 a unit

LO, Inc., is considering an investment of $447,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $285,800 and $89,400, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 5 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $67,000 in nominal terms at that time. The one-time net working capital investment of $21,000 is required immediately and will be recovered at the end of the project. The corporate tax rate is 22 percent. What is the project’s total nominal cash flow from assets for each year?

Using the legend provided below, classify each statement as to the taxpayer for dependency exemption purposes.

QC = Could be a qualifying child QR = Could be a qualifying relative

B = Could satisfy the definition of both a qualifying child and a qualifying relative

N = Could not satisfy the definition of either a qualifying child or a qualifying relative

a. Taxpayer's father-in-law reports gross income of $3,500 but does not live with her.

b. Taxpayer's child is 25, lives at home but is unemployed.

c. Taxpayer's half-sister, age 18 lives with her and reports gross income of $2,800.

d. Taxpayer's unmarried son, age 17, reports gross income of $15,000 and is a resident of England.

e. Taxpayer's grandfather reports gross income of $3,000, and does not live with him.

f. The taxpayer's aunt reports gross income of $6,800 and lives with her.

g. Taxpayer's eligible foster child, age 14, lives with her and has no gross income.

h. Taxpayer's nephew, age 29, lives with the taxpayer and reports gross income of $1,750.

i. Taxpayer's half-brother is age 27 and a full-time student.

j. Taxpayer's daughter, age 17, lives with her and reports gross income of $6,400.

Consider the following bond issued by Halliburton:

• coupon rate: 8.294%, with semi-annual coupon payments
• Face value: $1,000
• Maturity date: August 1, 2023

Assume that today is August 2, 2016. Suppose, for the sake of argument, that the annual discount rate is 2.01%, with semi-annual compounding. What is the value of the bond?

Do not round at intermediate steps in your calculation. Round your answer to the nearest penny. Do NOT include a minus sign! Do not type the $ symbol.

The nominal yield on 6-month T-bills is 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5%. In the spot exchange market, 1 yen equals $0.011. If interest rate parity holds, what is the 6-month forward exchange rate? Round the answer to five decimal places. Do not round intermediate calculations.