FINC Finc400 Principles of Financial Management Questions and Answers Week 2.pdf

2023




FINC Finc400 Principles of
Financial Management
Questions and Answers
Week 2




JK





,1

The capital structure for Cain Supplies is:

Cain Supplies
Debt @ 10% $ 200,000
Common stock, $10 par 400,000
Total $ 600,000
Common shares 40,000




Compute the stock price for Cain if it sells at 17 times earnings per share and
EBIT is $70,000. The tax rate is 30 percent. (Do not round
intermediate calculations. Round your answer to 2 decimal
places.)

Explanation
Interest=0.10 × $200,000
=$20,000


Cain Supplies
EBIT $70,000
Less: Interest 20,000
EBT $50,000
Less: Taxes @ 30% 15,000
EAT $35,000
Shares 40,000



EPS=$35,,000
=$0.88


Stock price=17 × $0.88
=$14.88

, 2

Shawn Pen & Pencil Sets Inc. has fixed costs of $155,200. Its product
currently sells for $7 per unit and has variable costs of $3.80 per unit. Mr. Bic,
the head of manufacturing, proposes to buy new equipment that will cost
$330,000 and drive up fixed costs to $228,000. Although the price will remain
at $7 per unit, the increased automation will reduce costs per unit to $3.00.

a. Compute the following break-even points. (Do not round
intermediate calculations.)



b. As a result of Bic’s suggestion, will the break-even point go up or down?


multiple choice
 The break-even point will go up. Correct
 The break-even point will go down.
Explanation
a.
Current break-even point = Fixed costs / (Price − Variable cost per unit)
= $155,200 / ($7 − 3.80)
= 48,500 units



Proposed break-even point = Fixed costs / (Price − Variable cost per unit)
= $228,000 / ($7 − 3.00)
= 57,000 units



b.
The break-even point will go up.