CHAPTER_13_PROBLEMS_AND_SOLUTIONS

# CHAPTER_13_PROBLEMS_AND_SOLUTIONS - Chapter 14 Capital...

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Chapter 14 Capital Structure and Leverage

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Problem 14-1
Solution 14-1

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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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Problem 14-6
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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Problem 14-8
Solution 14-8

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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.

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CHAPTER_13_PROBLEMS_AND_SOLUTIONS - Chapter 14 Capital...

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