Jim and Jane are considering the possibility of opening their own machine shop. They expect first-year sales to be $800,000, and they feel that their variable costs will be approximately 50% of sales. Their fixed costs in the first year will be $260,000. Jim and jane are considering two ways of financing the firm: (a) 60% equity financing and 40% debt at 7%, or (b) 100% equity financing. They can sell common stock to their relatives for $10 per share. Either way, they will need to raise $800,000. Compute their break-even point in dollars.

Jim and Jane are considering the possibility of opening their own machine shop. They expect first-year sales to be $800,000, and they feel that their variable costs will be approximately 50% of sales. Their fixed costs in the first year will be $260,000. Jim and jane are considering two ways of financing the firm: (a) 60% equity financing and 40% debt at 7%, or (b) 100% equity financing. They can sell common stock to their relatives for $10 per share. Either way, they will need to raise $800,000. Compute their break-even point in dollars.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter26: Real Options

Section: Chapter Questions

Problem 5P

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