Compute the break-even point in sales dollars.

a. Assume that fixed costs of Celtics Company are $180,000 per year, variable cost is $12 per unit, and selling price is $30 per unit. Determine the break-even point in sales dollars.

b. Hawks Corporation breaks even when its sales amount to $89,600,000. In 2014, its sales were $14,400,000, and its variable costs amounted to $5,760,000. Determine the amount of its fixed costs.

c. The sales of Niners Corporation last year amounted to $20,000,000, its variable costs were $6,000,000, and its fixed costs were $4,000,000. At what level of sales dollars would the Niners Corporation break even?

d. What would have been the net income of the Niners Corporation in part ( c ), if sales volume had been 10% higher but selling prices had remained unchanged?

e. What would have been the net income of the Niners Corporation in part ( c ), if variable costs had been 10% lower?

f. What would have been the net income of the Niners Corporation in part ( c ), if fixed costs had been 10% lower?

g. Determine the break-even point in sales dollars for the Niners Corporation on the basis of the data given in ( e ) and then in ( f ).

Kay Construction has the following mutually exclusive projects available. The company has historically used a three year cutoff for projects. The required return is 12 percent.

Year. Project A Project B

0. -$126,000. -$196,000

1. 64500. 44500

2. 45500. 59500

3. 55500. 85500

4. 50500. 115500

5. 45500. 130500

a. Calculate the payback period for both projects.

b. Calculate the NPV for both projects.

c. Which project, if any, should the company accept?

What is calculating “breakeven” CDS spread and valuing existing CDS?

Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Sales for 2016 were $275 million and net income for the year was $8.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.3 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

1. If sales are projected to increase by $100 million, or 36.36%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $ million
   
2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
   %
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
   Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

   Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$
   Line of credit	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$
   Common stock	$
   Retained earnings	$
   Total liabilities and equity	$

(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following:

a.  A bond that has a ​$1,000 par value​ (face value) and a contract or coupon interest rate of 10.2 percent. Interest payments are $51.00 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 10 years. The​ firm's marginal tax rate is 34 percet.

b.  A new common stock issue that paid a $1.81 dividend last year. The​ firm's dividends are expected to continue to grow at 6.8 percent per​ year, forever. The price of the​ firm's common stock is now $27.45.

c.  A preferred stock that sells for $143 pays a dividend of 9.3 ​percent, and has a​ $100 par value.  

d.  A bond selling to yield 12.1 percent where the​ firm's tax rate is 34 percent.

a. The​ after-tax cost of debt is .... ​%. ​(Round to two decimal​ places.)

b.  The cost of common equity is......​%. ​(Round to two decimal​ places.)

c.  The cost of preferred stock is ....%. ​(Round to two decimal​ places.)

d.  The​ after-tax cost of debt is ......​%. ​(Round to two decimal​ places.)

1. Cranberry Inc. is considering the production of a new smart phone that will require an initial investment of $2 million. The project is expected to yield cash flows for 5 years. The firm expects to sell 5,500 units per year for a net cash flow of $140 each for the first 2 years. After the first two years of sales, their main competitor is expected to launch a new smart phone. As a result, two things could happen:

• Sales for the rest of the project could decline to 4,000 units per year (30% probability), OR
• Sales for the rest of the project will decline to 3,000 units per year (70% probability)
• Assume that Cranberry pays no taxes and that the relevant cost of capital is equal to 15%.

Required

1. What is the NPV of the project?
2. Cranberry has the option to abandon the project after two years. If Cranberry decides to abandon the project, the firm can salvage the assets for $1,300,000 at the end of year 2. Compute the NPV of the project with this option and compute the value of the option.

1. A firm's market values of equity and debt are $750,000 and $250,000, respectively. In addition, the firm's book values of equity and debt are $700,000 and $300,000, respectively. The before-tax cost of debt = 6%; RF = 4%; beta (13) = 0.8; the market risk premium = 10%; and the tax rate = 20%.

Calculate the WACC (weighted average cost of capital).

2. A firm has the following capital structure based on market values: equity 65 percent and debt 35 percent. The current yield on government T-bills is 2 percent, the expected return on the market portfolio is 10 percent, and the firm's beta is approximated at 2.1. The firm's common shares are trading at $25, and the current dividend level of $3 per share is expected to grow at an annual rate of 4 percent. The firm can issue debt at a 3 percent premium over the current risk-free rate. The firm's tax rate is 40 percent, and the firm is considering a project to be funded out of internally generated funds that will not alter the firm's overall risk. This project requires an initial investment of $12 million and promises to generate net annual after-tax cash flows of $2 million perpetually.

Should this project be undertaken?

3. A firm wishes to raise funds in the following proportions: 20 percent debt, 20 percent preferred shares and 60 percent common equity. Assume the cost of internally generated funds is 15 percent. Annual after-tax cost of debt is 5.86%. Cost of preferred equity is 6.12%. It believes all of the common equity component can be raised using internally generated funds.

• Find the WACC
• Determine the marginal cost of capital (MCC) if the firm must raise funds beyond a break point (i.e. break point is the maximum investment in which all targeted equity can be financed internally). Assume the cost of new common equity issues is 20 percent.
• Explain the concept of WACC and MCC. In what circumstances would you use one over the other?

Project L requires an initial outlay at t = 0 of $75,104, its expected cash inflows are $13,000 per year for 11 years, and its WACC is 10%. What is the project's IRR? Round your answer to two decimal places.

%

CBA Corporation's outstanding bonds are selling at $950. The bonds have a face value of $1000, annual coupon rate of 8.5%, and 10 years until maturity. CBA is planning to sell new bonds to raise additional capital. New bonds will be as risky as the old bonds. However, the firm will incur flotation costs of 10% on new bond issue.

A. Calculate investors required rate of return on new bonds.

B. Calculate the before-tax cost of (new) debt.

A store has 5 years remaining on its lease in a mall. Rent is $2,100 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

1. Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

   -Select-YesNoItem 1

2. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.

     %

Milton Industries expects free cash flows of $ 8 million each year.​ Milton's corporate tax rate is 40 %​, and its unlevered cost of capital is 13 %. Milton also has outstanding debt of $ 33.57 ​million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without​ leverage? b. What is the value of Milton Industries with​ leverage?

The current stock price for a company is $49 per share, and there are 3 million shares outstanding. The beta for this firms stock is 1.4, the risk-free rate is 4.8, and the expected market risk premium is 5.6%. This firm also has 270,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 24 years to maturity, a face value of $1,000, and an annual yield to maturity of 7%. If the corporate tax rate is 31%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 3.0%. The probability distributions of the risky funds are:   

The correlation between the fund returns is .0667.

Suppose now that your portfolio must yield an expected return of 9% and be efficient, that is, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-1. What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-2. What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stocks: ???%

Bonds: ???%

A financial institution has the following market value balance sheet structure:

a. The bond has a 10-year maturity, a fixed-rate coupon of 9 percent paid at the end of each year, and a par value of $10,300. The certificate of deposit has a 1-year maturity and a 5 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.)
b. If at the end of year 1 market interest rates have increased 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk?
c. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,707 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends.
d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,300?
e. What factors have caused the changes in operating performance and market value for this FI?