Your business plan for your proposed start-up firm envisions first-year revenues of $120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.a. What are expected profits based on these expectations?b. What is the degree of operating leverage based on the estimate of fixed costs and expected profits?c. If sales are 10% below expectation, what will be the decrease in profits?d. Show that the percentage decrease in profits equals DOL times the 10% drop in sales.e. Based on the DOL, what is the largest percentage shortfall in sales relative to original expectations that the firm can sustain before profits turn negative?f. What are break-even sales at this point?g. Confirm that your answer to (f) is correct by calculating profits at the break-even level of sales.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Your business plan for your proposed start-up firm envisions first-year revenues of $120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.
a. What are expected profits based on these expectations?
b. What is the degree of operating leverage based on the estimate of fixed costs and expected profits?
c. If sales are 10% below expectation, what will be the decrease in profits?
d. Show that the percentage decrease in profits equals DOL times the 10% drop in sales.
e. Based on the DOL, what is the largest percentage shortfall in sales relative to original expectations that the firm can sustain before profits turn negative?
f. What are break-even sales at this point?
g. Confirm that your answer to (f) is correct by calculating profits at the break-even level of sales.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 1 images
