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Chapter 14
Capital Structure and Leverage
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View Full Document Problem 141
Solution 141
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View Full Document Problem
±
Elephant Books sells paperback books for $7 each.
The variable cost per
book is $5.
At current annual sales of 200,000 books, the publisher is just
breaking even.
It is estimated that if the authors’ royalties are reduced, the
variable cost per book will drop by $1.
What are the fixed costs?
Solution
$7(200,000)  $5(200,000)  F = 0
F = $400,000.
$7(200,000)  $4(200,000)  F = 0
F = $600,000.
$600,000  $400,000 = $200,000
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View Full Document Problem 146
Solution
±
A.
8,000 units
18,000 units
±
Sales
$200,000
$450,000
±
Fixed costs
140,000
140,000
±
Variable costs
120,000
270,000
±
Total costs
$260,000
$410,000
±
Gain (loss)
($
60,000
)
$
40,000
B. QBE =
=14,000 units.
±
S
BE
= Q
BE
(P) = (14,000)($25) = $350,000.
V
P
F
−
Sales
Costs
Dollars
Units of Output
(Thousands)
800,000
600,000
400,000
200,000
05
10
15
20
Fixed Costs
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View Full Document Problem 148
Solution 148
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View Full Document Problem
Volvo is attempting to estimate its optimal capital structure.
Volvo’s current
capital structure consists of 45% debt and 55% equity, however, the CEO
Jorgen Schmidt increase the debt. The risk free rate, kRF, is 3.25%, the
market risk premium, k
M
k
RF
, is
7.25% and the firm’s tax rate is 40%. At the
present time Volvo’s cost of equity is 9.5%, which is determined using the
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This note was uploaded on 02/12/2010 for the course ACCOUNT 30624700 taught by Professor Ken during the Spring '10 term at American InterContinental University Illinois.
 Spring '10
 Ken

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