% Change in Sales Essay Example

Question 1.

% Change IN EBIT)

% Change in Sales

10% increase

(180*9000)

Variable cost

(95*9000)

Fixed cost

-550,000

-550,000

% change in Ebit

%change in sales

0.472222

% Change in Net Income

10% increase

(180*9000)

Variable cost

(95*9000)

Fixed cost

-550,000

-550,000

less; interest

(1500,000*0.08*

-120,000

-120,000

Net of tax

% change in Ebit

%change in sales

DCL = DFL × DOL

DCL= (0.7*0.47) = 0.33

Question 2.

  1. Beta should make a new investment since, the venture will generate a positive Net present value of $400,000

Initial Outlay

1,000,000

1,000,000

Current share price

97560.98

88888.89

The company should therefore consider making an investment before the share market learns the true value of the company’s existing assets since, the company will realize more shares at low cost.

C. The new venture should be financed using the new Debt since, the debt capital is cheap as well as attract tax shield

Question 3.

(in millions of dollars)

Forecast

Forecast basis

$ 1,500.0

$ 1,650.0

% of Sales

SGA Expenses

% of Sales

Less Interest

Interest rate x Debt03

Taxes (40%)

Net Income

Dividends

Add. To retained earnings

BALANCE SHEET

(in millions of dollars)

Forecast

Forecast

Forecast basis

Without AFN

0

% of Sales

Accounts receivable

% of Sales

Inventories

% of Sales

Total current assets

Net plant and equipment

% of Sales

Total assets

$ 1,000.0

Liabilities and equity

Accounts payable & Accruals

% of Sales

Notes payable

Carry-over

% Change in Sales

Total current liabilities

Long-term bonds

Carry-over

% Change in Sales 1

Total liabilities

Common stock

Carry-over

% Change in Sales 2

Retained earnings

RE02 + RE03

Total common equity

Total liabilities and equity

$ 1,000.0

$ 1,005.0

Required assets =

Specified sources of financing =

$ 1,005.0

Additional funds needed (AFN)

$ (180.00)

Debt Equity ratio

New Funding at 85% capacity

External fund at 100% -180,000

Therefore at 85 %=( 0.85*1870, 000) =$153,000

Question 4.

15% sales growth

Taxable Income

Net Profit

Current Assets

Non-Current Assets

Liabilities/Equity

Asset to sales

Debt to equity

Profit Margin

Question 6.

Your lease payment will be $19,694.13.

Payment Summary

$1,000,000.00

Advanced Payment

$19,694.13

Advanced Payment

$19,694.13

Lease Payment

$19,694.13

Lease Residual

$95,000.00

Lease or buy

The company should consider leasing the equipment since, the lease payment is less as well as the amount is tax deductible with flexible terms of lease.

Question 7.

Value of a right= Value of the right = Market value – Average price

Average price= {800*3) =2400

Value of a right= {2400-1920) =480/800) =$0.6 per share

The ex-rights share price

Step 1: Calculate market value of ABC PLC prior to the rights issue

Market Value before rights issue

($3x 10 million shares)=$30 million

Step 2: Calculate cash proceeds raised from the rights issue

Cash $3,000,000

Step 3: Calculate number of shares after the rights issue

Number of Shares

(10 million shares+(3/2.4 million)=1125,000 shares

Step 4: Calculate Theoretical Ex-Rights Price

Theoretical Ex-Rights Price

(30 million+3 million)=$33 million

$2.9per share

11,250,000

The value of the investment cum rights and ex-rights

Cum right

Value of 1 Cum Right = (Stock market price – subscription price) DIVIDED BY (# of rights needed to buy 1 new share PLUS 1)

Value of cum right= {3-2.4)/2+1}=$0.3 per share

Ex right price= {Stock market price – subscription price) DIVIDED BY (# of rights needed to buy 1 new share)

Value of ex. right= {3-2.4)/1}=0.6 per share

Question 8.

Price of the bond

Present Value of Interest Payments = c × F × 

1 − (1 + r)-t

Debenture

Term to Maturity (Years)

Coupon Rate (%)

Price of the bond

Duration of a bond

% Change in Sales 3

Debenture

Term to Maturity (Years)

Coupon Rate (%)

Duration (Yrs)

Question 9.

Interest (11%*2000) =220

(220*7, 7277)=$1600

0.6139*1900=1176

Market value of debentures (1176+1700) =$2876

Coupon rate need to be for the debentures to sell at par

(1+9%/202=1.2%

  1. Calculate the cost of the call provision

Npv of the debenture= $1,711.71

Question 10

The price of a Promissory Note

[400,000*10.25}=41000*180/365 days=20,219

What is the interest rate for the 180 days?

20219*10.25%) =$2072

Question 11.

Miller-Orr model.

% Change in Sales 4

arget cash balance and upper limit using the Miller-Orr model.

Optimal cash level:

Upper limit on cash:

1,053.24

T

Question 12.

  1. Calculate the economic order quantity (EOQ).

Square root {2D C/c/Hc}

Where D is the demand and Hc is the holding cost and Co id the Ordering cost.

Square root{2*80,000*220/1.2}= 5416 Units

  1. Calculate the ordering cost.

Demand*cost per order

Ordering cost= {80,000/5416}*$220}=$3250

  1. Calculate the holding cost

Average inventory*Holding cost per unit}

Holding cost = {40,000*1, 20=$48000

  1. Calculate the average inventory

  2. EOQ/2= 5416/2}=2708 Units

  3. Calculate the annual total cost

{Holding Ordering cost}=

Total cost= {48000+3250) =$51250

  1. Assuming that it takes 20 days to receive an order once it has been placed, determine the reorder point in terms of litres of pigment. (Note: Use a 365-day year.)

Reorder point= Daily usage* Lead time}

Reorder point= (5416*20 days) =108320

Question 13.

Square root {2D C/c/Hc}

Where D is the demand and Hc is the holding cost and Co id the Ordering cost.

EOQ= Square root (2*20,000*2/0.5) =$160,000

Question 14.

VC=Nd(S)-Nd2 (Ke) ^RT}

D2=Log(S/K) + (0.5variacne+Rf)/r.root (t}

D2-D1- r.root (t}}

VC=Nd (24)-Nd2 (23) ^5.25} =

But Nd1=log (24/23) + (0.5*0.07+5.25)/0.26 root 1} =

Nd1=log (1.04)+5.28)/0.26}=log24.3=1.386

Nd2=1.386-0.26} =1.126

VC= {1.126(24) +1.386(23) =$58.89

Question 15

Call Option Profit/Loss = Stock Price at Expiration — Breakeven Point

Breakeven Stock Price = Call Option Strike Price + Premium Paid

Breakeven Stock Price = {9.25+0.76) =$10.01

Call Option Profit = {10.25-10.01) $0.24

Put Option

Breakeven Stock Price= {10.75-0.80) =$9.95

Put Option loss= {9.25-9.95) =-0.7

Question 16.

Question 17

The gain from the merger

270,000/0.01=$27 million

The net cost of the cash offer?

Acquiring: value = 4,500,000

Target: value = 5900,000

Gain from merger = $1400, 000

The net cost of the share alternative

(4.5+9+27)*50% shareholding= $20.25 million

The NPV of the acquisition under

  • the cash offer:=(Gain-cost)

= (27 000,000-1400, 000) =$25.6 million

  • the share offer

= (27 000,000-20.25million) =$6.75 million

Question 18

Cash flow

1,420,000

1.4977 pvif

-400,000

New Asset

-1,300,000

Gain from takeover

Maximum price to be paid

New Asset

1,300,000

Shares (5million @$2 per share

10,000,000

Purchase cost

11,700,000