MyLab LO1 12-1. (Business and financial risk) Which of the following sources of new earnings volatility demonstrates the effect of business versus financial risk (discuss the ratio- nale for your decisions): a. Bowson Mfg, Inc. recently constructed a new office building and borrowed 100 percent of the money needed to fund the project. b. In the past, Clarkson Resources has hired an outside firm to prepare all of its printed documents. However, last year the firm acquired its own printing press (paying cash). c. Merriwether Heating and AC Company is located in Chicago. The firm's sole business has been installing and maintaining office heating and cooling systems. However, recently the company's owner, who is an avid skier, decided to purchase a golf course. LO2 12-2. (Break-even analysis) You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year's operations, which ended yesterday. Sales $50,439,375 Variable costs (25,137,000) Revenue before fixed costs $25,302,375 Fixed costs (10.143,000) EBIT $15,159,375 Interest expense (1,488,375) Earnings before taxes $13,671,000 Taxes at 21% (2.870,910) Net income $10,800.090 Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions: a. What is the firm's break-even point in sales dollars? b. If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase? 12-3. (Break-even point and selling price) Specialty Steel, Inc. will manufacture and sell MyLas 400,000 units next year. Fixed costs will total $350,000, and variable costs will be 70 percent of sales. a. The firm wants to achieve a level of earnings before interest and taxes of $250,000. What selling price per unit is necessary to achieve this result? b. Set up a pro forma income statement to verify your solution to part (a). LO3 12-4. (Break-even point and operating leverage) Rockstar, Inc. manufactures a complete line of men's and women's casual shoes for independent merchants. The average selling price of its finished product is $85 per pair. The variable cost for this same pair of shoes is $44. The firm incurs fixed costs of $150,000 per year. a. What is the break-even point in pairs of shoes sold for the company? b. What is the dollar sales volume the firm must achieve to reach the break-even point? CHAPTER 12 Determining the Financing Mix 433 c. What would be the firm's operating profit or loss (that is, net operating income) at the following units of production sold: 7,000 pairs of shoes? 9,000 pairs of shoes? 15,000 pairs of shoes? 12-5. (Operating leverage) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average ya selling price for the various units is $300 and the associated variable cost is $120 per unit. Fixed costs for the firm average $220,000 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 (i.e., the ratio of the percent change in EBIT divided by the corresponding percent change in sales) 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 firm's sales level should increase by 20 percent from the volume noted in part (c)? 12-6. (Capital structure theory) Match each of the following definitions to the LO4 appropriate terms: TERMS Independence theory with corporate taxes Independence theory-no taxes Saucer-shaped cost-of-capital curve DEFINITIONS The cost of capital is unaffected by the firm's choice of debt and equity financing. The cost of capital decreases as the firm initially uses debt to substitute for equity financing but eventually begins to increase as extreme levels of debt are used. The cost of capital decreases continuously as the firm increases its reliance on debt financing. 12-7. (Capital structure theory) Which of the following statements most appropriately describes how agency costs affect a firm's choice of capital structure? Explain. a. When firm owners borrow money, they have an incentive to engage in exces- sive risk taking (that is, investing in very risky projects) since they are manag- ing someone else's money. b. When firms have very limited investment opportunities and little debt financing combined with healthy profits that provide them with free cash flow, their management team might squander the firm's earnings on ques- tionable investments.

MyLab LO1 12-1. (Business and financial risk) Which of the following sources of new earnings volatility demonstrates the effect of business versus financial risk (discuss the ratio- nale for your decisions): a. Bowson Mfg, Inc. recently constructed a new office building and borrowed 100 percent of the money needed to fund the project. b. In the past, Clarkson Resources has hired an outside firm to prepare all of its printed documents. However, last year the firm acquired its own printing press (paying cash). c. Merriwether Heating and AC Company is located in Chicago. The firm's sole business has been installing and maintaining office heating and cooling systems. However, recently the company's owner, who is an avid skier, decided to purchase a golf course. LO2 12-2. (Break-even analysis) You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year's operations, which ended yesterday. Sales $50,439,375 Variable costs (25,137,000) Revenue before fixed costs $25,302,375 Fixed costs (10.143,000) EBIT $15,159,375 Interest expense (1,488,375) Earnings before taxes $13,671,000 Taxes at 21% (2.870,910) Net income $10,800.090 Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions: a. What is the firm's break-even point in sales dollars? b. If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase? 12-3. (Break-even point and selling price) Specialty Steel, Inc. will manufacture and sell MyLas 400,000 units next year. Fixed costs will total $350,000, and variable costs will be 70 percent of sales. a. The firm wants to achieve a level of earnings before interest and taxes of $250,000. What selling price per unit is necessary to achieve this result? b. Set up a pro forma income statement to verify your solution to part (a). LO3 12-4. (Break-even point and operating leverage) Rockstar, Inc. manufactures a complete line of men's and women's casual shoes for independent merchants. The average selling price of its finished product is $85 per pair. The variable cost for this same pair of shoes is $44. The firm incurs fixed costs of $150,000 per year. a. What is the break-even point in pairs of shoes sold for the company? b. What is the dollar sales volume the firm must achieve to reach the break-even point? CHAPTER 12 Determining the Financing Mix 433 c. What would be the firm's operating profit or loss (that is, net operating income) at the following units of production sold: 7,000 pairs of shoes? 9,000 pairs of shoes? 15,000 pairs of shoes? 12-5. (Operating leverage) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average ya selling price for the various units is $300 and the associated variable cost is $120 per unit. Fixed costs for the firm average $220,000 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 (i.e., the ratio of the percent change in EBIT divided by the corresponding percent change in sales) 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 firm's sales level should increase by 20 percent from the volume noted in part (c)? 12-6. (Capital structure theory) Match each of the following definitions to the LO4 appropriate terms: TERMS Independence theory with corporate taxes Independence theory-no taxes Saucer-shaped cost-of-capital curve DEFINITIONS The cost of capital is unaffected by the firm's choice of debt and equity financing. The cost of capital decreases as the firm initially uses debt to substitute for equity financing but eventually begins to increase as extreme levels of debt are used. The cost of capital decreases continuously as the firm increases its reliance on debt financing. 12-7. (Capital structure theory) Which of the following statements most appropriately describes how agency costs affect a firm's choice of capital structure? Explain. a. When firm owners borrow money, they have an incentive to engage in exces- sive risk taking (that is, investing in very risky projects) since they are manag- ing someone else's money. b. When firms have very limited investment opportunities and little debt financing combined with healthy profits that provide them with free cash flow, their management team might squander the firm's earnings on ques- tionable investments.

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter9: Accounting For Receivables

Section: Chapter Questions

Problem 4TP: You are considering two possible companies for investment purposes. The following data is available...

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