In: Accounting

**Question 4.**

Suppose that your firm has higher fixed cost-to-variable cost ratio than comparable firms. Explain how EBITDA multiple valuation would be influenced by the difference in this ratio.

**Answer:**

**Various measures can be used to interpret operating
leverage. These include the ratio of fixed costs to total costs,
the ratio of fixed costs to variable costs,** and the Degree
of Operating Leverage (DOL). All of these measures depend on sales.
The ratios of fixed cost to total costs and fixed costs to variable
costs tell us that if the unit variable cost is constant, then as
sales increase, operating leverage decreases. The DOL tells us, as
a percentage, that for a given level of sales and profit, a company
with higher fixed costs has a higher contribution margin – the
marginal profit per unit sold. Therefore, its operating income
increases more rapidly with sales than a company with lower fixed
costs (and correspondingly lower contribution margin).

**The EBITDA multiple is a financial ratio that compares a
company’s Enterprise Value to its annual EBITDA (which can be
either a historical figure or a forecast/estimate). This multiple
is used to determine the value of a company and compare it to the
value of other, similar businesses.**

**A company’s EBITDA multiple provides a normalized ratio
for differences in capital structure, taxation, fixed assets, and
for comparing disparities of operations in various
companies.** The ratio takes a company’s enterprise value
(which represents market capitalization plus net debt) and compares
it to the Earnings Before Interest, Taxes, Depreciation, and
Amortization (EBITDA) for a given period.

**EBITDA or Earnings before Interest, Tax, Depreciation,
and Amortization i**s the income derived from operations
before non-cash expenses, income taxes, or interest expense. It
reflects the company’s financial performance in terms of
profitability prior to certain uncontrollable or non-operational
expenses.

**A higher EBITDA margin indicates a company’s operating
expenses are smaller than its total revenue, which leads to a
profitable operation**. EBITDA can also be compared to sales
as an EBITDA Margin.

Question 5.
Provide a reason why a privately-held firm is valued
higher/lower than comparable publicly-held firms. To get the full
mark, you must discuss both cases.

Suppose that a firm has a price-earnings ratio which is higher
than a value deemed to be normal. Investors tend to infer from this
information that
a.
the firm's bonds will increase in their ratings.
b.
the firm's bonds will decrease in their ratings.
c.
the firm's stock is over-valued and one should consider selling
the stock.
d.
the firm's stock is under-valued and one should consider buying
the stock.
e.
the firm will be paying increased dividends.
For an...

(i)“The cost of capital for multinational firms usually higher
than domestic firm”. Explain why the cost of capital is different
between each country. (10 POINTS WITH EXPLANATION MUST)
(ii)Neelofa Hijab is one of the local brands which are very
successful in Malaysia. Since the brand was very strong in the
local market with the achievement average sales of RM5 million from
the overseas market. Thus Neelofa Hijab was decided to expand their
brand into another country which is Indonesia. Discuss...

4. Laramie Company has variable cost ratio of 0.40. The fixed
cost is $66,000 and 22,000 units are sold at break-even. What is
the price? What is the variable cost per unit? The contribution
margin per unit? Note : Do NOT round interim computations. Round
answers to the nearest cent.

Provide a reason why a privately-held firm is valued
higher/lower than comparable publicly-held firms. To get the full
mark, you must discuss both cases.

Which of the following statement regarding beta is NOT correct?
Firms with higher fixed cost than its peers would generally
have higher equity beta.
Firms with higher debt than its peers would generally have
higher equity beta.
Debt beta is usually low and almost equal to zero.
Asset beta is always lower than equity beta.

If a firm has a total fixed cost of $75 and an average variable
cost of $35 for producing 10 units of output, the average total
cost would be:
If a firm has an average total cost of $55 and an average fixed
cost of $10 for producing 5 units of output, then the total
variable cost will be:

1.Amber Angler's fixed operating costs are $2m and its variable
cost ratio 70%. The firm has $2.1m in bonds outstanding at an
interest rate of 4%. Amber has 0.05m shares of preferred stock
which pays a $4 dividend. Crow is in the 40% corporate income tax
bracket. Forecasted sales for next year are $9m. What is Amber's
degree of financial leverage?
Round to two decimal places.
b.A firm with a DFL of 1.9 expects EBIT to increase by 3.90%. If...

Suppose a company has fixed costs of $47,600 and variable cost
per unit of 4/9x + 333 dollars,
where x is the total number of units produced. Suppose
further that the selling price of its product is
1767 −5/9x dollars per unit.
(a) Find the break-even points. (Enter your answers as a
comma-separated list.)
x =
(b) Find the maximum revenue. (Round your answer to the nearest
cent.)
$
(c) Form the profit function P(x) from the cost
and...

Suppose a company has fixed costs of $48,000 and variable cost
per unit of
4
9
x + 333 dollars,
where x is the total number of units produced. Suppose
further that the selling price of its product is
2357 −
5
9
x dollars per unit.
(a) Find the break-even points. (Enter your answers as a
comma-separated list.)
x =
(b) Find the maximum revenue. (Round your answer to the nearest
cent.)
$
(c) Form the profit function P(x)...

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