Financial Analysis

Financial Analysis

Question. 1

Exercise 3: The Earfull Company

Break Even Analysis

Constant price = 200 per player

Variable cost =150 per player

Fixed cost = 250,000 per year

Tax rate 30%

Company's assets = 600,000

60% debt and 40% equity (1000 ordinary shares)

Question 2

Exercise 4: DOL and DTL

Part. A

If the firm's production increased from 20,000 to 22,000 units, what would be the percentage change in earnings per share?

Units 20,000

EBIT 400,000

DOL2

DTL3

% change in EPS

DOL= % change in EBIT/% change in Sales

2= .10/ %change in sales

%change in sales = .05

DTL= % change in EPS/ %change in sales

3= % change in EPS /.05

.15 = % change in EPS

Part B.

Explain in words what in general is meant by financial leverage

Financial leverage can be termed as the degree to which an investor or a firm employs the borrowed money. Firms who have taken high leverage are termed as highly risky and thus, it can go bankrupt. In addition to this, if the company is not able to pay back its debts then it may result in severe difficulties for future in terms of getting new lenders. However, financial leverage is not something bad for the firm but the firm must have the capacity to handle it accurately. On a positive note, financial leverage can lead to increase in return on investment for the shareholders (readyratios.com, n.d).

Formula

One of the common financial leverage ratio, which is used by majority of the firms is debt to equity ratio.

Debt to Equity = Total Debt

Share holders Equity

Question 3

Exercise 5: Elmo Enterprises

Part a

i) Assuming 9% taxes

Calculating firms value with 100% debt

Value of the Firm = free cash flow to the firm / cost of capital =2,600,000/ .09

=28,888,888

Calculating firms value with 100% equity

Value of the Firm = free cash flow to the firm / cost of capital = 2,600,000/.13

= 20,000,000

Part a

ii)

If the company has 10million debt i.e 50% debt

Weighted Average Cost of capital = (.5)(.09) + (.5)(.13)

= 11%

Value of the firm = 2,600,000/ .11

= 23,636,363

Part b

i) calculating the value of the firm with taxes

Value of the firm = 2,600,000(1-.4)/ .13

=12,000,000

Value of the equity = 12,000,000 -10,000,000

=2,000,000

Value of the firm = 2,600,000(.6)/ .11

=14,181,181

Question 4

Exercise 13-9: JWG Company

Selling price of book = $ 10

Variable operating Cost = $8

Fixed operating cost = $ 40,000

Part A. how many books shall be sold to achieve Break Even point given the following circumstances;

All figures remain same as last year

BEP = ...