Integrative Leverage and risk Firm R has sales of 102,000 units at $2.01 per unit, variable operating costs of $1.66 per unit, and fixed operating costs of $6,010. Interest is $10,110 peryear. Firm W has sales of 102,000 units at $2.59 per unit, variable operating costs of $0.97 per unit, and fixed operating costs of $62,100. Interest is $17,300 per year. Assume that both firmsare in the 40% tax bracket.a. Compute the degree of operating, financial, and total leverage for firm R.b. Compute the degree of operating, financial, and total leverage for firm W.c. Compare the relative risks of the two firms.d. Discuss the principles of leverage that your answers illustrate.a. The degree of operating leverage for firm Ris(Round to two decimal places.)

It helps in measuring how the revenue growth will translate into an increase in operating income. It…

Answered: Integrative Leverage and risk Firm R…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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For a certain investment project, the net present worth can be expressed as functions of sales price (X) and variable production cost Y of PW= 12,550 (2X - Y) - 8000. The base values for X and Y arc $25 and $15, respectively. If the sales price is increased 15% over the base price, how much change in NPW can be expected?(a) 10% (b) 20% (c) 13.68% (d) 21.82%
A project has following estimated data: Price = $60 per unit; variable cost = $30 per unit; Fixed cost = $100,000; Company has borrowings of $100,000 at a rate of 10%. Calculate the combined leverage of the project when units sold are 10,000 units. а. 1.58 b. 0.63 с. 1.50 d. 1.05
1. Analyze the following investment options @ R=3%, 7%, and 10% - show all work (including units). Show gross and net PV calculations (ROI not necessary): a. a. a. Incremental cost of $12,000; nets total savings of $14,400 in year 3. Incremental cost of $12,000; nets savings of $4,800 per year for 3 years. Incremental cost of $12,000; nets savings of $6,000 in year 1; returns $5,000 in year 2; returns $3,400 in year 3.
= $ A project has the following estimated data: price 104.00 per unit; variable costs = $60.50 per unit; fixed costs investment = $39,600.00; life = 6 years. What is the $37,500.00; required return = 8%; initial degree of operating leverage at the financial break - even level of output? a) 4.38 b) 7.38 c) 6.38 d) 3.38 e ) 5.38
Alternative G has a first cost of $250,000 and annual costs of $73,000. Alternative H has a first cost of $350,000 and annual costs of $48,000. If the alternatives are considered to last indefinitely, the rate of return on the increment of investment is closest to: Note: n is infinity, use/* A^/AP 25%/year 20%/year 21%/year 12%/year a. b. C. d.
The most likely outcomes for a particular project are estimated as follows: Unit price Variable cost $ 49 21 $309, 000 29, 200 uni ts per year Fixed cost Expected sales However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 13 years and requires an initial investment of $0.99 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 35% and the required rate of return is 17%. What is project NPV in the "best case" scenario, that is, assuming all variables take on the best possible value? (Round your answer to the nearest whole dollar amount.) NPV in the "best case" scenario 1961296 What about the "worst case" scenario? (Use the minus sign for negative values. Round your answer to the nearest whole dollar amount.) NPV in the "worst case" scenario -148345
A project which requires an investment of OMR 18,000, duration of the project is 2 years, average net cash inflows were OMR 12,000 and annual variable cost is OMR 8,000. Assuming a discount rate at 12%, evaluate the sensitivity of Initial Investment influencing NPV with above information. Select one: O A. 11.25% B. 12.67% O C. 16.87% D. 6.75%
Keane & Co plc is considering two possible investments. The company requires an Accounting Rate of Return of 12% and payback within 2 years. It has a cost of capital of 12%. Forecast sales and production units Year 1 Year 2 Year 3 Year 4 Contribution per unit Fixed cost per year Initial investment Residual (scrap) value Accounting Rate of Return Internal Rate Return Discount factors at 12% are: Year 1 Year 2 Year 3 Year 4 Year 5 0.893 0.797 0.712 0.636 0.567 Project J 60,000 110,000 80,000 50,000 £40 £800,000 £7,600,000 £300,000 9.5% 8% Project K 30,000 24,000 20,000 12,000 £120 £700,000 £5,500,000 £150,000 19% 18%
A $1,000 investment in project that returns $100/year for 5 years is to be compared with a $700 investment in a project that returns $90/year for 4 years. What would be a good metric(s) for comparing these projects? A. Equivalent uniform annual cash flow, only. B. Internal rate of return (only correct choice of these options) C. Internal rate of return and equivalent uniform annual cash flow D. Benefit to cost ratio and internal rate of return E. Benefit to cost ratio (only correct choice of these options) Give answer fast and only type answer
A company has a 13% WACC. One of its core divisions is considering two mutuallyexclusive investments with the net cash flows given below. The division’s beta is βDIV= 1.45, risk free rate is kRF = 6.8% and risk-premium on the market is RPM =7% Year Project A project B 0 -$1000 -$1000 1 $200 $800 2 $700 $600 3 $600 $250 4 $800 $150 5 -$300 $170 6 $250 $150 Given the information above, you are required to answer the followings:i. What is each project’s Payback and discounted payback periods and interpretthese numbers?ii. What is each project’s NPV?iii. What is each project’s IRR?
A company has a 13% WACC. One of its core divisions is considering two mutuallyexclusive investments with the net cash flows given below. The division’s beta is βDIV= 1.45, risk free rate is kRF = 6.8% and risk-premium on the market is RPM =7% Year Project A project B 0 -$1000 -$1000 1 $200 $800 2 $700 $600 3 $600 $250 4 $800 $150 5 -$300 $170 6 $250 $150 Given the information above, you are required to answer the followings: i. What is difference between mutually exclusive and independent projects?ii. List the characteristics of a good capital budgeting technique.iii. Briefly explain the acceptance and rejection criteria for each technique regardingmutually exclusive and independent projects.
Cash payback period, net present value method, and analysis Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows: Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis. Instructions 1. Compute the following for each product: a. Cash payback period. b. The net present value. Use the present value of $1 table appearing in this chapter (Exhibit 2). 2. Prepare a brief report advising management on the relative merits of each project.

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