Question Details

Capital Structure and Leverage


21. Texas Industries estimates that its fixed operating costs are $1,000,000, and its variable costs are $6.00 per unit sold. Each unit produced sells for $8.00. What is the company- unit sales breakeven point?
a. 125,000 units
b. 166,667 units
c. 250,000 units
d. 500,000 units



22. Texas Products Inc. has a division that makes plastic composite bags for the space industry.  The division has fixed costs of $45,000 per month, and it expects to sell 45,000 bags per month.  If the variable cost per bag is $6.00, what price must the division charge in order to break even?
a. $6.00
b. $7.00
c. $8.00
d. $9.00



23. Smith Boating is trying to determine its optimal capital structure. The company- CFO believes the optimal debt ratio is somewhere between 20 and 50%. Her staff has developed the following projections for the company- EPS and stock price for various debt levels. Assuming that the firm uses only debt and common equity, what is Smith- optimal capital structure?

Debt Ratio		Projected EPS	  Projected Stock Price
   20%			    $4.35			$44.32
   30%			    $4.85			$46.23
   40%			    $5.55			$46.01
   50%			    $5.95			$44.55

a. 20% debt ratio
b. 30% debt ratio
c. 40% debt ratio
d. 50% debt ratio



24. Jacob Industries is trying to determine its optimal capital structure. The company- CFO believes the optimal debt ratio is somewhere between 30 and 60%. His staff has developed the following projections for the company- EPS and stock price for various debt levels. Assuming that the firm uses only debt and common equity, at what debt ratio is the company- WACC minimized?

Debt Ratio		Projected EPS	Projected Stock Price
    30%		    $5.35			$54.32
    40%		    $6.85			$56.23
    50%		    $7.55			$57.01
    60%		    $7.95			$55.55

a. 30% debt ratio
b. 40% debt ratio
c. 50% debt ratio
d. 60% debt ratio



25. Chip Motors has $20 million in assets, which are financed with $4 million of debt and $16 million of equity. If Chip- beta is currently 2.4 and its tax rate is 40 percent, what is its unlevered beta?
a. 1.503
b. 1.934
c. 2.087
d. 2.400





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