Question Details

P4-2 Future value calculation Without referring to tables or to the preprogrammed
function on your financial calculator, use the basic formula for future value
along with the given interest rate, i, and the number of periods, n, to calculate
the future value interest factor in each of the cases shown in the following table.
Compare the calculated value to the value in Appendix Table A-1.

	Case		Interest Rate		No.# of periods
	
	A		12%				2
	B		6				3
	C		9				2
	D		3				4




P4-3 Future value tables Use the future value interest factors in Appendix Table A-1
in each of the cases shown in the table on the facing page to estimate, to the nearest year, how long it would take an initial deposit, assuming no withdrawals,

A. To double
B. To quadruple


		Case			Interest Rate

		A			7%
		B			40
		C			20
		D			10

Chapter 12

P12-4

P12-4 Breakeven analysis Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98 each, variable operating costs are $10.48 per CD, and annual fixed operating costs are $73,500.

a. Find the operating breakeven point in number of CDs.

b. Calculate the total operating costs at the breakeven volume found in part a. 

c. If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business? 

d. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c?


Chapter 12

P12-19 EBIT-EPS and capital structure Data-Check is considering two capital structures.
The key information is shown in the following table. Assume a 40% tax rate.

Source of Capital		Structure A			Structure B

Long-Term Debt			$100,000 @ 16% coupon rate	$200,000 @ 17% coupon rate
Common Stock			4,000 shares			2,000 shares
	


a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.

b. Plot the two capital structures on a set of EBIT-EPS axes.

c. Indicate over what EBIT range, if any, each structure is preferred.

d. Discuss the leverage and risk aspects of each structure.

e. If the firm is fairly certain that its EBIT will exceed $75,000, which structure would you recommend? Why?


Chapter 12

P12-21 Integrative—Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment:

Capital Structure		Cost of Debt	No. of Common Stock Shares		Required Return
Debt ratio

0%			0%			200,000				12%
15			8			170,000				13
30			9			140,000				14
45			12			110,000				16
60			15			  80,000				20



a. Calculate earnings per share for each level of indebtedness.

b. Use Equation 12.12 and the earnings per share calculated in part a to calculate a price per share for each level of indebtedness. 

c. Choose the optimal capital structure. Justify your choice.



**This below is equation 12.12

Estimating Value
The value of the firm associated with alternative capital structures can be estimated by using one of the standard valuation models. If, for simplicity, we assume that all earnings are paid out as dividends, we can use a zero-growth valuation model such as that developed in Chapter 7. The model, originally stated in
Equation 7.3, is restated here with EPS substituted for dividends (because in each year the dividends would equal EPS): (12.12)
By substituting the expected level of EPS and the associated required return, ks, into Equation 12.12, we can estimate the per-share value of the firm, P0.
P0 5
EPS
Ks

Po = EPS 
        Ks
EXAMPLE
CHAPTER 12 Leverage and Capital Structure 569 BLE 12.14
Principles of Managerial Finance, by Lawrence J. Gitman. Published by Addison Wesley. Copyright © 2006 by Pearson Education, Inc.

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