财务管理基础13版BRD5.docx
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财务管理基础13版BRD5
Chapter5
DiscussionQuestions
5-1.
Discussthevarioususesforbreak-evenanalysis.
Suchanalysisallowsthefirmtodetermineatwhatlevelofoperationsitwillbreakeven（earnzeroprofit）andtoexploretherelationshipbetweenvolume,costs,andprofits.
5-2.
Whatfactorswouldcauseadifferenceintheuseoffinancialleverageforautilitycompanyandanautomobilecompany?
Autilityisinastable,predictableindustryandthereforecanaffordtousemorefinancialleveragethananautomobilecompany,whichisgenerallysubjecttotheinfluencesofthebusinesscycle.Anautomobilemanufacturermaynotbeabletoservicealargeamountofdebtwhenthereisadownturnintheeconomy.
5-3.
Explainhowthebreak-evenpointandoperatingleverageareaffectedbythechoiceofmanufacturingfacilities（laborintensiveversuscapitalintensive）.
Alabor-intensivecompanywillhavelowfixedcostsandacorrespondinglylowbreak-evenpoint.However,theimpactofoperatingleverageonthefirmissmallandtherewillbelittlemagnificationofprofitsasvolumeincreases.Acapital-intensivefirm,ontheotherhand,willhaveahigherbreak-evenpointandenjoythepositiveinfluencesofoperatingleverageasvolumeincreases.
5-4.
Whatroledoesdepreciationplayinbreak-evenanalysisbasedonaccountingflows?
Basedoncashflows?
Whichperspectiveislongerterminnature?
Forbreak-evenanalysisbasedonaccountingflows,depreciationisconsideredpartoffixedcosts.Forcashflowpurposes,itiseliminatedfromfixedcosts.
Theaccountingflowsperspectiveislonger-terminnaturebecausewemustconsidertheproblemsofequipmentreplacement.
5-5.
Whatdoesrisktakinghavetodowiththeuseofoperatingandfinancialleverage?
Bothoperatingandfinancialleverageimplythatthefirmwillemployaheavycomponentoffixedcostresources.Thisisinherentlyriskybecausetheobligationtomakepaymentsremainsregardlessoftheconditionofthecompanyortheeconomy.
5-6.
Discussthelimitationsoffinancialleverage.
Debtcanonlybeuseduptoapoint.Beyondthat,financialleveragetendstoincreasetheoverallcostsoffinancingtothefirmaswellasencouragecreditorstoplacerestrictionsonthefirm.Thelimitationsofusingfinancialleveragetendtobegreatestinindustriesthatarehighlycyclicalinnature.
5-7.
Howdoestheinterestrateonnewdebtinfluencetheuseoffinancialleverage?
Thehighertheinterestrateonnewdebt,thelessattractivefinancialleverageistothefirm.
5-8.
Explainhowcombinedleveragebringstogetheroperatingincomeandearningspershare.
Operatingleverageprimarilyaffectstheoperatingincomeofthefirm.Atthispoint,financialleveragetakesoveranddeterminestheoverallimpactonearningspershare.AdelineationofthecombinedeffectofoperatingandfinancialleverageispresentedinTable5-6andFigure5-5.
5-9.
Explainwhyoperatingleveragedecreasesasacompanyincreasessalesandshiftsawayfromthebreak-evenpoint.
Atprogressivelyhigherlevelsofoperationsthanthebreak-evenpoint,thepercentagechangeinoperatingincomeasaresultofapercentagechangeinunitvolumediminishes.Thereasonisprimarilymathematical—aswemovetoincreasinglyhigherlevelsofoperatingincome,thepercentagechangefromthehigherbaseislikelytobeless.
5-10.
Whenyouareconsideringtwodifferentfinancingplans,doesbeingatthelevelwhereearningspershareareequalbetweenthetwoplansalwaysmeanyouareindifferentastowhichplanisselected?
Thepointofequalityonlymeasuresindifferencebasedonearningspershare.Sinceourultimategoalismarketvaluemaximization,wemustalsobeconcernedwithhowtheseearningsarevalued.Twoplansthathavethesameearningspersharemaycallfordifferentprice-earningsratios,particularlywhenthereisadifferentialriskcomponentinvolvedbecauseofdebt.
Chapter5
Problems
1.EnscoLightingCompanyhasfixedcostsof$100,000,sellsitsunitsfor$28,andhasvariablecostsof$15.50perunit.
a.Computethebreak-evenpoint.
b.Ms.Wattscomesupwithanewplantocutfixedcoststo$75,000.However,morelaborwillnowberequired,whichwillincreasevariablecostsperunitto$17.Thesalespricewillremainat$28.Whatisthenewbreak-evenpoint?
c.Underthenewplan,whatislikelytohappentoprofitabilityatveryhighvolumelevels（comparedtotheoldplan）?
5-1.Solution:
EnscoLightingCompany
a.
b.
Thebreakevenleveldecreases.
c.Withlessoperatingleverageandasmallercontributionmargin,profitabilityislikelytobelessatveryhighvolumelevels.
2.EatonToolCompanyhasfixedcostsof$200,000,sellsitsunitsfor$56,andhasvariablecostsof$31perunit.
a.Computethebreak-evenpoint.
b.Ms.Eatoncomesupwithanewplantocutfixedcoststo$150,000.However,morelaborwillnowberequired,whichwillincreasevariablecostsperunitto$34.The salespricewillremainat$56.Whatisthenewbreak-evenpoint?
c.Underthenewplan,whatislikelytohappentoprofitabilityatveryhighvolumelevels（comparedtotheoldplan）?
5-2.Solution:
EatonToolCompany
a.
b.
Thebreakevenleveldecreases.
c.Withlessoperatingleverageandasmallercontributionmargin,profitabilityislikelytobelessthanitwouldhavebeenatveryhighvolumelevels.
3Drawtwobreak-evengraphs—oneforaconservativefirmusinglabor-intensiveproductionandanotherforacapital-intensivefirm.Assumingthesecompaniescompetewithinthesameindustryandhaveidenticalsales,explaintheimpactofchangesinsalesvolumeonbothfirms’profits.
5-3.Solution:
Labor-Intensiveandcapital-intensivebreak-evengraphs
Thecompanyhavingthehighfixedcostswillhavelowervariablecoststhanitscompetitorsinceithassubstitutedcapitalforlabor.Withalowervariablecost,thehighfixedcostcompanywillhavealargercontributionmargin.Therefore,whensalesrise,itsprofitswillincreasefasterthanthelowfixedcostfirmandwhenthesalesdecline,thereversewillbetrue.
4TheHarmonCompanymanufacturesskates.Thecompany’sincomestatementfor2008isasfollows:
HARMONCOMPANY
IncomeStatement
FortheYearEndedDecember31,2008
Sales（30,000skates@$25）
$750,000
Less:
Variablecosts（30,000skatesat$7）
210,000
Fixedcosts
270,000
Earningsbeforeinterestandtaxes（EBIT）
270,000
Interestexpense
170,000
Earningsbeforetaxes（EBT）
100,000
Incometaxexpense（35%）
35,000
Earningsaftertaxes（EAT）
$65,000
Giventhisincomestatement,computethefollowing:
a.Degreeofoperatingleverage.
b.Degreeoffinancialleverage.
c.Degreeofcombinedleverage.
d.Break-evenpointinunits.
5-4.Solution:
HarmonCompany
Q=30,000,P=$25,VC=$7,FC=$270,000,I=$170,000
a.
b.
c.
d.
5.U.S.Stealhasthefollowingincomestatementdata:
UnitsSold
TotalVariableCosts
Fixed
Costs
TotalCosts
TotalRevenue
OperatingIncome（Loss）
40,000
$80,000
$50,000
$130,000
$160,000
$30,000
60,000
120,000
50,000
170,000
240,000
70,000
a.ComputeDOLbasedontheformulabelow（seepage128foranexample）:
b.ConfirmthatyouranswertopartaiscorrectbyrecomputingDOLusingformula
5–3onpage___.Theremaybeaslightdifferenceduetorounding.
Qrepresentsbeginningunitssold（allcalculationsshouldbedoneatthislevel）.Pcanbefoundbydividingtotalrevenuebyunitssold.VCcanbefoundbydividingtotalvariablecostsbyunitssold.
5-5.Solution:
U.S.Steal
a.
5-5（Continued）
b.
6Leno’sDrugStoresandHall’sPharmaceuticalsarecompetitorsinthediscountdrugchainstorebusiness.TheseparatecapitalstructuresforLenoandHallarepresentedbelow.
Leno
Hall
Debt@10%
$100,000
Debt@10%
$200,000
Commonstock,$10par
200,000
Commonstock,$10par
100,000
Total
$300,000
Total
$300,000
Shares
20,000
Commonshares
10,000
a.Computeearningspershareifearningsbeforeinterestandtaxesare$20,000,$30,000,and$120,000（assumea30percenttaxrate）.
b.ExplaintherelationshipbetweenearningspershareandthelevelofEBIT.
c.Ifthecostofdebtwentupto12percentandallotherfactorsremainedequal,whatwouldbethebreak-evenlevelforEBIT?
5-6.Solution:
a.LenoDrugStoresandHallPharmaceuticals
Leno
Hall
EBIT
$20,000
$20,000
Less:
Interest
10,000
20,000
EBT
10,000
0
Less:
Taxes@30%
3,000
0
EAT
7,000
0
Shares
20,000
10,000
EPS
$.35
0
EBIT
$30,000
$30,000
Less:
Interest
10,000
20,000
EBT
20,000
10,000
Less:
Taxes@30%
6,000
3,000
EAT
14,000
7,000
Shares
20,000
10,000
EPS
$.70
$.70
EBIT
$120,000
$120,000
Less:
Interest
10,000
20,000
EBT
110,000
100,000
Less:
Taxes@30%
33,000
30,000
EAT
77,000
70,000
Shares
20,000
10,000
EPS
$3.85
$7.00
5-6.（Continued）
b.Before-taxreturnonassets=6.67%,10%and40%attherespectivelevelsofEBIT.Whenthebefore-taxreturnonassets（EBIT/TotalAssets）islessthanthecostofdebt（10%）,LenodoesbetterwithlessdebtthanHall.Whenbefore-taxreturnonassetsisequaltothecostofdebt,bothfirmshaveequalEPS.ThiswouldbewherethemethodoffinancinghasaneutraleffectonEPS.Asreturnonassetsbecomesgreaterthantheinterestrate,financialleveragebecomesmorefavorableforHall.
c.12%$300,000=$36,000break-evenlevelforEBIT.
7.GlynnEnterprisesandMonroe,Inc.,bothproducefluidcontrolproducts.Theirfinancialinformationisasfollows:
CapitalStructure
Gly
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