Finance

Problems

13-1

BREAK-EVEN ANALYSIS - A company’s fixed operating costs are $430,000, its variable costs are $2.95 per unit, and the product’s sales price is $4.50. What is the company’s break-even point; that is, at what unit sales volume will its income equal its costs?

13-5

FINANCIAL LEVERAGE EFFECTS - Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure.