{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch 16 Problems

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

This preview shows pages 1–4. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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
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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}