Labayne Assignment 4 - finmar PDF

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Acivity 4 – The Firm’s Capital Structure and degree of leverageEssay Rubrics: A total of 10 points each. 8 points for content; 2 points for construcion a. Why does business risk vary from industry to industry? Business risk can change over ime and it varies from one industry to another because it de...

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Activity 4 – The Firm’s Capital Structure and degree of leverage Essay Rubrics: A total of 10 points each. 8 points for content; 2 points for construction a. Why does business risk vary from industry to industry? Business risk can change over time and it varies from one industry to another because it depends on a number of factors. The more stable the unit sales and prices of a firm’s products, the lower its business risk. b. What is financial risk, and how does these risk arise? Financial risk is the additional risk placed on the common shareholders as a result of the decision to finance with debt. It is also the risk that the company may not be able to settle its liabilities and may go bankrupt. It arises due to losses in the financial markets or movement in stock prices. Problems Problem A Carbon Corporation has a policy of paying out 70% of its earnings. The growth rate of the company remains to be constant at 7%. What is the optimal capital structure for Carbon Corporation given the following capital structures applicable to the company? Debt ratio 20% 40% 50%

Expected EPS

Cost of equity

P2.50 3.25 3.75

15% 16% 17%

Problem B Oxygen Co. has the following forecasted data for 2020

Forecast sales in units Selling price per unit Variable cost per unit Fixed Cost: Manufacturing Overhead Interest Expense Earnings per share

50,000.00 80.00 50.00 600,000.00 50,000.00 8.50

1. The break-even point in units is = 1.67 2. What is the degree of operating leverage at 50,000 units sales level? 1.06 3. What is the degree of financial leverage at 50,000 units sales level? 20,000

Problem C AU Inc.’s EBIT changes by 15%. The firm computed that they have a Degree of financial leverage of 2.5. What is the expected change in the earnings per share of AU Inc.? 1.38

Problem D The Lithium Company will produce 50,000 boxes of cereals next year. Variable costs is 30% of sales, while fixed costs will total P70,000. 1. The price of each boxes of cereals to be sold for Lithium Company to achieve an EBIT of P45,000 is = 3.286 2. What is the degree of total leverage if the earnings after interest but before taxes of Lithium Company is P40,000 and the interest expense is P5,000? 2.89...