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Ch 16 Problems - Finding the Breakeven Quantity Lotus...

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Finding the Breakeven Quantity Lotus Machinery expects to sell 10,000 widgets per month. Its fixed costs are $2,000 and each widget costs $1.50 in variable costs. What price must Lotus charge to break even? Q = F/(P-V) 10000 = 20001P-1.5 P = $1.70 13.11
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Using the Hamada Equation Martek Corp. can begin producing a new electronics project, with cash flows starting next year. The T bill rate is 80/0 and the expected market return is 13.65%. The average debt/equity ratio in the electronics industry is 25%. Beta for the electronics industry is 1.24. Martek expects to use 40% debt to finance its electronics project. Its tax rate is 35% and its pretax cost of debt is 10 % What is Martek's WAee for this project? Unlever B to find assetlunlevered beta BL = BU(l+ (l-T)D/E) 1.24 = BU(!+(1-.35)(.25» BU= 1.07 Relever beta according to Martek capital structure BL = 1.07(1+(1-.35)(.4/.6» = 1.53 Find cost of equity R = Rf + (Rm - Rf) = 8 + (13.65-8)(1.53) = 16.64 Find WACC WACC=WdxRdx 1-T+WexRe=.4x .65 x 1O+.6x 16.64= 12.6% 13.40
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Re-capitalizing a firm • ABC is all equity, with 200,000 shares outstanding. EBIT is $2,000,000 and will remain constant. All earnings are paid out as
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