Question

Please show work step by step

1) You own a restaurant and are considering additional waiters. Alfred’s pay scheme would be $120 per evening. Blanchard’s pay scheme would be $10 per table served.

A. Which would be considered a variable coat and which a fixed cost?

B. Charles, a third potential waiter, asks for $60 per evening plus $5/table. From the perspectives of Alfred, Blanchard an Charles, who is taking the most risk and who the least? Who has the most to gain and who the least? C. As you are about to choose, Dutch enters and offers the following: He will accept $7.50/table but wants a guarantee of minimum $30 per evening. Comparing Charles’ and Dutch’s offers, where do they “break even” for you (i.e., at how many tables will you be paying them the same amount)?

2) XYZ company is looking for investors. For an investment (price) of $25 per unit (share) of preferred stock it will pay $1 dividend annually

XYZ is also issuing (selling) to investors another type of preferred stock for $25. Unlike the above ordinary preferred, in case of a missed dividend (not enough money “coming down the waterfall”), the unpaid amount any year will be added to its dividend the following year, and continue so until all missed payments are made.

What should be the dividend of this “cumulative preferred” compared to the 1% of the ordinary?

3) In which two ways is corporate profits tax similar to the payments to common shareholders (owners) as opposed to the claimants higher up on the company cash flow waterfall?

Answer 1

1)

Facts:

Alfred’s pay scheme would be $120 per evening.

Blanchard’s pay scheme would be $10 per table served.

Charles, a third potential waiter, asks for $60 per evening plus $5/table.

Dutch will accept $7.50/table but wants a guarantee of minimum $30 per evening.

A) Between Alfred and Blanchard the cost required by Alfred is fixed in nature while Blanchard's cost is variable in nature. This is because Alfred's cost will be incurred irrespective of the tables booked. While in case of Blanchard, the restaurant will pay 0$ in case no table is served.

B) who is taking the most risk and who the least? Who has the most to gain and who the least

The most risk is taken by Blanchard as his entire earning is variable. In case no customer visits the restaurant he will earn 0$.

The least risk is borne by Alfred as he will always be in a position to earn 120$.

Blanchard has the ability to earn the most because his entire earning is in the form of variable compensation. Alfred has the possibility of earning the least because his entire earning is in the form of fixed compensation.

C)Comparing Charles’ and Dutch’s offers, where do they “break even” for you (i.e., at how many tables will you be paying them the same amount)?

Charles, a third potential waiter, asks for $60 per evening plus $5/table.

Dutch will accept $7.50/table but wants a guarantee of minimum $30 per evening.

Break Even = Fixed Cost /(Variable cost₁ -Variable cost₂)

At 24 tables, both will break even.

2) Further details required

3) In which two ways is corporate profits tax similar to the payments to common shareholders (owners) as opposed to the claimants higher up on the company cash flow waterfall?

A) Corporate tax rate has direct correlation with the level of profits like equity. If there is profit the tax would be positive, if not there will be no tax position.

B) Any amount paid as part of corporate tax or to equity holders (in the form of dividends) is moved out of business, i.e. it is not reinvestible.