# answers-odd-problems-ch16 - Chapter 16 Capital Structure...

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Chapter 16 Capital Structure Decisions: The Basics SOLUTIONS TO END-OF-CHAPTER ODD NUMBERED PROBLEMS 16-1 a. Here are the steps involved: (1) Determine the variable cost per unit at present, V: Profit = P(Q) - FC - V(Q) \$500,000 = (\$100,000)(50) - \$2,000,000 - V(50) 50(V) = \$2,500,000 V = \$50,000. (2) Determine the new profit level if the change is made: New profit = P 2 (Q 2 ) - FC 2 - V 2 (Q 2 ) = \$95,000(70) - \$2,500,000 - (\$50,000 - \$10,000)(70) = \$1,350,000. (3) Determine the incremental profit: Profit = \$1,350,000 - \$500,000 = \$850,000. (4) Estimate the approximate rate of return on new investment: ROI = Profit/Investment = \$850,000/\$4,000,000 = 21.25%. Since the ROI exceeds the 15 percent cost of capital, this analysis suggests that the firm should go ahead with the change. Mini Case: 16 - 1

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b. If we measure operating leverage by the ratio of fixed costs to total costs at the expected output, then the change would increase operating leverage: Old: ) Q ( V FC FC + = 000 , 500 , 2 \$ 000 , 000 , 2 \$ 000 , 000 , 2 \$ + = 44.44%. New:
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## This note was uploaded on 04/12/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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answers-odd-problems-ch16 - Chapter 16 Capital Structure...

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