# Finance Homework 7 Assignment 2015

Question 1 (Break-even point and selling price) Parks Casting Inc. will manufacture and sell210,000 units next year. Fixed costs will total \$300,000 and variable costs will be 50 percent ofsales. a. The firm wants to achieve a level of earnings before interest and taxes of \$260,000. Whatselling price per unit is necessary to achieve this result?b. Set up an analytical income statement to verify your solution to part (a)Question 2 (Break-even point operating leverage) Footwear Inc. manufactures a complete lineof mens and womens dress shoes for independent merchant. The average selling price of itsfinished product is \$90 per pair. The variable cost for this same pair of shoes is \$60. FootwearInc. incurs fixed costs of \$160,000 per year. a. What is the break-even point in pairs of shoes for the company?b. What is the dollar sales volume the firm must achieve to reach the break-even point?c. What would be the firms profit or loss at the following units of production sold: 4,000 pairs of shoes? 11,000 pairs of shoes? 18,000 pairs of shoes?Question 3 (Operating leverage) Rocky Mount Metals Company manufactures an assortmentof wood burning stoves. The average selling price for the various units is \$550. The associatedvariable costs is \$350 per unit. Fixed costs for the firm average \$118,000 annually. a. What is the break-even point in units for the company?b. What is the dollar sales volume the firm must achieve to reach the break-even point?c. What is the degree of operating leverage for a production and sales level of 5,000 unitsfor the firm? Calculate to three decimal placesd. What will be the projected effect on earnings before interest and taxes if the firms saleslevel should increase by 40 percent from the volume noted in part ©?Question 4 (Residual dividend policy) FarmCo, Inc follows a policy of paying out cashdividends equal to the residual amount that remains after funding 50 percent of it planned capitalexpenditures. The firm tries to maintain a 50 percent debt and 50 percent equity capital structureand does not plan on issuing more stock in the coming year. FarmCos CFO has estimated thatthe firm will earn \$13 million in the current year. a. If the firm maintains its target financing mix and does not issue any equity next year,what is the most it could spend on capital expenditures next year given its earningsestimate?b. If FarmCo capital budget for next year is \$10 million, how much will the firm pay individends and what is the resulting dividend payout percentage?Question 5 (Constant dollar dividend payout policy) Parker Prints is in negotiation with twoof its largest customers to increase the firms sales dramatically. The increase will require thatParker expand its production facilities at a cost of \$20 million. Parker expects to pay out \$8million in dividends to its shareholders next year. Parker maintains a 40 percent debt in its capitalstructure. a. If Parker earns \$18 million next year, how much common stock will the firm need to sellin order to maintain its target capital structure?b. If Parker wants to avoid selling any new stock, how much can the firm spend on newcapital expenditures?Question 6 (Stock dividends) in the spring of 2014 the CFO of Placebo Pharmaceutical Inc. took a proposal to the firms board of directors to distribute a noncash dividend to the firmsshareholders in the form of new shares of common stock. Specifically, the CFO proposed that thecompany pay 0. 015 shares of stock to the holders of each share of common stock that the holderof 1,000 shares of stock would receive an additional 15 shares of common stock. a. If placebo had total net income for the year of \$10,000,000 and 21,000,000 shares ofcommon stock outstanding before the stock dividend, what are the firms earnings pershare?b. After paying the stock dividend, what are the firms earnings per share?c. If you owned 1,000 shares of stock before the stock dividend, how many dollars ofearnings did the firm earn on your 1,000 share investment? After the stock dividend ispaid, how many dollars of earnings did the firm earn on your larger share holding? Whateffect would you expect from the payment of the stock dividend on your total investmentin the firm?Question 7 (Stock dividends) The Dunn Corporation is planning to pay dividends of \$480,000. There are 240,000 shares outstanding, and earnings per share are \$6. The stock should sell for\$52 after the ex-dividend date. If, instead of paying a dividend, the firm decides to repurchasestock. a. What should be the repurchase price/b. How many shares should be repurchased?c. What if the repurchase price is set bellow or above your suggested price in part (a)?d. If you own 100 shares, would you prefer that the company pay the dividend or repurchasestock?

# Finance Homework 7 Assignment 2015

Question
Question 1 (Break-even point and selling price) Parks Casting Inc. will manufacture and sell
210,000 units next year. Fixed costs will total \$300,000 and variable costs will be 50 percent of
sales.
a. The firm wants to achieve a level of earnings before interest and taxes of \$260,000. What

selling price per unit is necessary to achieve this result?

b. Set up an analytical income statement to verify your solution to part (a)

Question 2 (Break-even point operating leverage) Footwear Inc. manufactures a complete line
of mens and womens dress shoes for independent merchant. The average selling price of its
finished product is \$90 per pair. The variable cost for this same pair of shoes is \$60. Footwear
Inc. incurs fixed costs of \$160,000 per year.
a. What is the break-even point in pairs of shoes for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What would be the firms profit or loss at the following units of production sold:

4,000 pairs of shoes? 11,000 pairs of shoes? 18,000 pairs of shoes?

Question 3 (Operating leverage) Rocky Mount Metals Company manufactures an assortment
of wood burning stoves. The average selling price for the various units is \$550. The associated
variable costs is \$350 per unit. Fixed costs for the firm average \$118,000 annually.
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What is the degree of operating leverage for a production and sales level of 5,000 units

for the firm? Calculate to three decimal places
d. What will be the projected effect on earnings before interest and taxes if the firms sales

level should increase by 40 percent from the volume noted in part ©?

Question 4 (Residual dividend policy) FarmCo, Inc follows a policy of paying out cash
dividends equal to the residual amount that remains after funding 50 percent of it planned capital
expenditures. The firm tries to maintain a 50 percent debt and 50 percent equity capital structure
and does not plan on issuing more stock in the coming year. FarmCos CFO has estimated that
the firm will earn \$13 million in the current year.

a. If the firm maintains its target financing mix and does not issue any equity next year,

what is the most it could spend on capital expenditures next year given its earnings
estimate?
b. If FarmCo capital budget for next year is \$10 million, how much will the firm pay in

dividends and what is the resulting dividend payout percentage?

Question 5 (Constant dollar dividend payout policy) Parker Prints is in negotiation with two
of its largest customers to increase the firms sales dramatically. The increase will require that
Parker expand its production facilities at a cost of \$20 million. Parker expects to pay out \$8
million in dividends to its shareholders next year. Parker maintains a 40 percent debt in its capital
structure.
a. If Parker earns \$18 million next year, how much common stock will the firm need to sell

in order to maintain its target capital structure?
b. If Parker wants to avoid selling any new stock, how much can the firm spend on new

capital expenditures?

Question 6 (Stock dividends) in the spring of 2014 the CFO of Placebo Pharmaceutical Inc.
took a proposal to the firms board of directors to distribute a noncash dividend to the firms
shareholders in the form of new shares of common stock. Specifically, the CFO proposed that the
company pay 0.015 shares of stock to the holders of each share of common stock that the holder
of 1,000 shares of stock would receive an additional 15 shares of common stock.
a. If placebo had total net income for the year of \$10,000,000 and 21,000,000 shares of

common stock outstanding before the stock dividend, what are the firms earnings per
share?
b. After paying the stock dividend, what are the firms earnings per share?

c. If you owned 1,000 shares of stock before the stock dividend, how many dollars of

earnings did the firm earn on your 1,000 share investment? After the stock dividend is
paid, how many dollars of earnings did the firm earn on your larger share holding? What
effect would you expect from the payment of the stock dividend on your total investment
in the firm?

Question 7 (Stock dividends) The Dunn Corporation is planning to pay dividends of \$480,000.
There are 240,000 shares outstanding, and earnings per share are \$6. The stock should sell for
\$52 after the ex-dividend date. If, instead of paying a dividend, the firm decides to repurchase
stock.

a. What should be the repurchase price/
b. How many shares should be repurchased?
c. What if the repurchase price is set bellow or above your suggested price in part (a)?
d. If you own 100 shares, would you prefer that the company pay the dividend or repurchase

stock?