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
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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?
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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
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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
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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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