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% Change in Sales Essay Example
 Category:Finance & Accounting
 Document type:Math Problem
 Level:High School
 Page:2
 Words:1001
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.

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 Debt_{03} 

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 
Carryover 

Total current liabilities 

Longterm bonds 
Carryover 

Total liabilities 

Common stock 
Carryover 

Retained earnings 
RE_{02} + RE_{03} 

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 

NonCurrent Assets 

Liabilities/Equity 

Asset to sales 

Debt to equity 

Profit Margin 
Question 6.
Your lease payment will be $19,694.13.
Payment Summary

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= {24001920) =480/800) =$0.6 per share
The exrights 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 ExRights Price
Theoretical ExRights Price 
(30 million+3 million)=$33 million 
$2.9per share 

11,250,000 
The value of the investment cum rights and exrights
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= {32.4)/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= {32.4)/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
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%

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.
MillerOrr model.
arget cash balance and upper limit using the MillerOrr model.
T 
Question 12.

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

Calculate the ordering cost.
Demand*cost per order
Ordering cost= {80,000/5416}*$220}=$3250

Calculate the holding cost
Average inventory*Holding cost per unit}
Holding cost = {40,000*1, 20=$48000

Calculate the average inventory

EOQ/2= 5416/2}=2708 Units

Calculate the annual total cost
{Holding Ordering cost}=
Total cost= {48000+3250) =$51250

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 365day 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}
D2D1 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=1.3860.26} =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 = {10.2510.01) $0.24
Put Option
Breakeven Stock Price= {10.750.80) =$9.95
Put Option loss= {9.259.95) =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:=(Gaincost)
= (27 000,0001400, 000) =$25.6 million

the share offer
= (27 000,00020.25million) =$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 