Soltions FH17

Future Value Interest Factors for One Dollar Compounded at i Percent for n Periods:

Future value calculation
Without referring to the preprogrammed function on your financial calculator or to tables, use the basic formula for future value along with the given interest rate, i, and the number of periods, n, to calculate the future value interest factor in each of the cases shown in the following table. Compare the calculated
value to the value in Appendix Table A–1.

Future value tables
Use the future value interest factors in Appendix Table A–1 in each of the cases shown in the following table to estimate, to the nearest year, how long it would take an initial deposit, assuming no withdrawals,
Case               Interest Rate
a. To double.                                  A                        7%
b. To quadruple.                            B                      40%
C                      20%
D                     10%

Breakeven analysis
Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98 each, variable operating costs are $10.48 per CD, and annual fixed operating costs are $73,500.

a. Find the operating breakeven point in number of CDs.
b. Calculate the total operating costs at the breakeven volume found in part a.
c. If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business?
d. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c?

Various capital structures
Charter Enterprises currently has $1 million in total assets and is totally equity-financed. It is contemplating a change in its capital structure.
Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%,60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio’s value?

EPS and optimal debt ratio-

Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.- –
Debt Ratio               Earnings per share (EPS)                Standard deviation of EPS
0%                                        $2.30                                                    $1.15
20%                                        $3.00                                                   $1.80
40%                                         $3.50                                                   $2.80
60%                                         $3.95                                                   $3.95
80%                                         $3.80                                                   $5.53

a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.