ch13pp - CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE...

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Determining price from EBIT Answer: e 1. The Price Co. will produce 55,000 widgets next year. Variable costs will equal 40% of sales, while fixed costs will total $110,000. At what price must each widget be sold for the company to achieve an EBIT of $95,000? a. $2.00 b. $4.45 c. $5.00 d. $5.37 e. $6.21 Operating decision Answer: d 2. Musgrave Co. has fixed costs of $46,000 and variable costs are 30% of the sales price of $2.15. At $2.15, Musgrave sells 40,000 units. Musgrave can increase sales by 10,000 units by cutting its unit price from $2.15 to $1.95, but variable cost per unit will remain at 30% of the sales price. Should it cut its price? a. No, EBIT decreases by $6,000. b. No, EBIT decreases by $250. c. Yes, EBIT increases by $11,500. d. Yes, EBIT increases by $8,050. e. Yes, EBIT increases by $5,050. Leverage and capital structure Answer: e 3. Which of the following statements is likely to encourage a firm to increase the amount of debt in its capital structure? a. Its sales become less stable over time.
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This note was uploaded on 10/20/2008 for the course FIN 301 taught by Professor Rj during the Spring '08 term at Univ. of Massachusetts Med. School.

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ch13pp - CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE...

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