Additionally, work received later than Week 7 of the course will not receive feedback prior to the final grading of the Portfolio Project. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment by the end of Week 6. Both firms have $20,000 in assets, a 40 percent tax rate, and an expected EBIT of $3,000.Ĭonstruct partial income statements, which start with EBIT, for the two firms.Ĭomplete Requirement 2 and submit your work by Sunday of this week so your professor can review and provide suggestions for improvement. Now, to develop an example which can be presented to PizzaPalace’s management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses $10,000 of 12 percent debt. Additionally, work received later than Week 6 of the course will not receive feedback prior to the final grading of the Portfolio Project. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment by the end of Week 5. Submit the spreadsheet by Sunday of Week 5 so the instructor can review your work and provide suggestions for improvement. Show the operating breakeven point if a company has fixed costs of $200, a sales price of $15, and variables costs of $10. What is operating leverage, and how does it affect a firm’s business risk? What is business risk? What factors influence a firm’s business risk?
ASSUME THAT THE LAST WORKER A FIRM HIRED PRODUCES 60 FREE
Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows. Provide a brief overview of capital structure effects. PPPZ Palace is in the 40% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures: When you suggested this to your new boss, he encouraged you to pursue the idea. When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. The firm is currently financed with all equity and it has 10 million shares outstanding. The company’s EBIT was $50 million last year and is not expected to grow. Assume you have just been hired as a business manager of PPPZ Pizza, a regional pizza restaurant chain.
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