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b)
1)
Case summary:
Company P is a regional pizza restaurant chain. The given details are as follows,
EBIT is $50 million,
Tax rate is 40%,
Risk-free
Market risk premium is 6%,
Outstanding shares 10 million.
As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.
To discuss: Business risk and factors influence firm’s business risk.
2)
To discuss: Operating leverage and factors influencing operating leverage and calculate the operating leverage when fixed costs are $200, sale price is $15, and variable cost is $10.
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Chapter 16 Solutions
Intermediate Financial Management (MindTap Course List)
- By modifying the break-even equation, a company is able to determine the sales required to earn a ________________ profit. a.banker's b.working capital c.target d. contributionarrow_forwardA firm faces uncertain revenues and uncertain costs. Its revenues may be$120,000, $160,000, or $175,000, with probabilities .2, .3, and .5,respectively. Its costs are $150,000 or $170,000 with chances .6 and .4,respectively. (Revenues and costs are independent.)a. How many possible profit outcomes exist? Draw a decision tree listingthese profit outcomes at the branch tips. Compute the firm’sexpected profit by folding back the tree. (It does not matter whichuncertainty, demand or cost, is resolved first in the tree.)b. Without a decision tree, calculate separately the firm’s expectedrevenue and expected cost. What is the firm’s expected profit? (Thisresult underscores a great computational convenience of theexpected-value criterion. Expected profit is equal to expected revenueminus expected cost; that is, expectations can be taken separately.)arrow_forwardHow many statements below about operating leverage are correct? 1. Operating leverage measures the sensitivity of a firm's operating income to changes in the firm's level of sales. 2. Automated operations results to greater operating leverage for the firm than mechanical operations. 3. An operațing leverage of 5 means that a firm's operating income will increase by P0.5 for every P1 increase in sales. 4. Operating leverage will decrease as the firm's margin of safety increases. 5. The higher the firm's operating leverage, the higher is its income potential but at the same time, the higher the risk of incurring loss. 1 2 4arrow_forward
- Suppose a company increases the price of its product and demand hardly declines.which of the following will increase? A) profit margin B) return - on - equity C) taxes D) all the abovearrow_forwardSubject :- Accountingarrow_forwardWhich of the following statements is true? A In linear break-even analysis, the contribution margin is the difference between the selling price and the average fixed cost. B The Theory of the Business Firm assumes perfect market competition. This means it assumes that the selling price decreases as a firm's production rate increases. C In the Theory of the Business Firm, profits per period are maximized at the production rate at which marginal cost equals average cost. D In the Theory of the Business Firm, profits per period are maximized at the production rate at which average cost is minimized. E All four statements are false.arrow_forward
- based on the attached what is the answer?arrow_forwardA high operating margin implies that ______________ . The company is in a better position to increase its finance cost The company is in a better position to absorb the finance cost The company is in a better position to reduce its overheads The company is in a better position to increase its pricesarrow_forwardWhich of the following statements about operating leverage is false? a. Operating leverage measures how operating income will be affected by changes in sales b. The degree of operating leverage is higher for companies with lower fixed costs c. Keeping all factors constant, the higher the contribution margin, the higher the operating leverage. d. All of the given answers are true. e. If the degree of operating leverage higher for a company, this means that the company is more risky than another company with low degree of operating leverage.arrow_forward
- The business risk of a company is most accurately measured by the company's: a. Debt-to-equity ratio b. Efficiency in using assets to generate sales c. Operating leverage and level of uncertainly about demand output prices and competitionarrow_forwardWhich of the following statements about operating leverage is false? O a. If the degree of operating leverage higher for a company, this means that the company is more riskyt another company with low degree of operating leverage. O b. Keeping all factors constant, the higher the contribution margin, the lower the operating leverage. O c. Operating leverage measures how operating income will be affected by changes in sales O d. All of the given answers are true. The degree of operating leverage is higher for comnanies with higher fived costs = here to search - hp %23 6. 7 V 3 4 W E R T' Y 岁 S D F G H K. V M. Σ 00 近arrow_forwardPlease solve all questiosarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
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