Principles of Finance 6e Chapter 8
Besley/Brigham
8-1
CHAPTER 8
ANSWERS
8-2 a. +
b. – The firm needs less manufacturing facilities, raw materials, and work in process.
8-3 Breakeven analysis, whether operating or financial, shows:
(a) profit planning in relationship to its main determinants.
(b) the effects of leverage on profitability.
8-4 The selling price per unit, the variable cost per unit, and total fixed costs are necessary to construct
8-5 Operating leverage is the presence of fixed costs in the operation of a firm. Operating profits
8-6 Financial leverage exists when fixed financing costs exist. The amount of earnings that can be
8-2
8-7 Firms that have higher degrees of leverage, no matter the type, are perceived as having greater
8-8 The operating breakeven point will be affected as follows:
a. An increase in the sales price –
8-9 It is generally not possible to specify an optimum planning period. The optimum length of time over
8-10 A cash budget is used to project the cash inflows and cash outflows during a specified time period.
________________________________________________________________
SOLUTIONS
8-1 a. Sales = 10,000 x $50 $500,000
Variable costs = 10,000 x $30 (300,000)
30$50$
−
c.
=== 5.2
000,80$
000,200$
NOI
tGrossprofi
DOL
Principles of Finance 6e Chapter 8
Besley/Brigham
8-3
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8-2
units200
750,1$500,2$
000,150$
QOpBEP =
−
=
8-3 DOL = 4.0x, so EBIT will change in the same direction by 4 percent for every 1 percent change in
sales.
%0.1010.0
000,800$
000,800$000,720$
%−=−=
−
=
8-5 a. 125,000 units 175,000 units
Sales ($15/unit) $1,875,000 $2,625,000
b.
units 140,000 =
$10 – $15
$700,000
=
V– P
F
=
QOpBE
Fixed Costs
($ millions)
Revenues
QOpBE
Output (thousands)
0.0
4.0
5.0
050 100 150 200 250 300
Chapter 8 Principles of Finance 6e
Besley/Brigham
8-4
c. Using Equation 8-4, the DOLs are:
5.0=
$700,000 – )175,000($5
)175,000($5
=
DOL
15.0 =
$700,000 – )150,000($5
)150,000($5
=
DOL
units 175,000
units 150,000
8-6 a. Total assets = Total liabilities & equity
= Accounts payable + Long-term debt + Common stock + Retained earnings
$1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000
b. Using the projected balance sheet:
Additions (New
2015 (1 + g) Financing, R/E) Pro Forma
Total assets $1,200,000 (1.25) $1,500,000
Current liabilities $ 375,000 (1.25) $ 468,750
Long-term debt 105,000 105,000
Principles of Finance 6e Chapter 8
Besley/Brigham
8-5
8-7 a.
units 40,000 =
0.75) – $5(1
$50,000
=
QOpBE
b. At operating BEP, EBIT = 0, so the financing section of Straight Arrow’s income statement
would be:
EBIT $ 0
Interest ($10,000)
c. If sales equal $300,000, the income statement would be:
Sales $300,000
Variable costs (0.75) (225,000)
Gross profit 75,000
===
===
1.67
$10,000 – $25,000
$25,000
I – EBIT
EBIT
DFL
3.0
$25,000
$75,000
EBIT
profit Gross
DOL
$300,000
EPS$270,000 = $0.45[1 + (-0.10)(5.0)] = $0.225
8-6
8-8 Cash 100.00 x 2 = 200.00
Accounts receivable 200.00 x 2 = 400.00
Long-term debt 400.00 400.00
Common stock 100.00 100.00
8-9 a. Craig Computers
Pro Forma Balance Sheet
December 31, 2016
($ millions)
Pro Forma
After
2015 (1 + g) Additions Pro Forma Financing Financing
Cash $ 3.5 (1.2) $ 4.20 $ 4.20
Receivables 26.0 (1.2) 31.20 31.20
Mortgage loan 6.0 6.00 6.00
Common stock 15.0 15.00 15.00
*Profit margin = $10.5/$350 = 3%.
Principles of Finance 6e Chapter 8
Besley/Brigham
8-7
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Addition to RE = NI – DIV = $12.6 – 0.4($12.6) = 0.6($12.6) = $7.56.
b. Current ratio = $105/$52.44 = 2.00x
The current ratio is poor compared to 2.5x in 2015 and the industry average of 3x.
c. (1) Craig Computers
Pro Forma Balance Sheet
December 31, 2020
($ millions)
Pro Forma
After
2015 (1 + g) Additions Pro Forma Financing Financing
Total curr. assets $ 87.50 (1.2) $105.00 $105.00
Total current liabilities $ 35.50 $ 39.00 $ 24.72
Mortgage loans 6.00 6.00 6.00
AFN = <14.28>
*PM = 3%; Payout = 40%.
(2) Current ratio = $105/$24.72 = 4.25x (good).
Chapter 8 Principles of Finance 6e
Besley/Brigham
8-8
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with a certain product or service or otherwise on a password-protected website for classroom use.
**The rate of return declines because of the decrease in the debt/assets ratio. The firm might,
with this slow growth, consider a dividend increase. A dividend increase would reduce future
increases in retained earnings, and in turn, common equity, which would help boost the ROE.
d. Craig probably could carry out either the slow growth or fast growth plan, but under the fast
growth plan (20 percent per year), the risk ratios would deteriorate, indicating that the company
might have trouble with its bankers and would be increasing the odds of bankruptcy.
8-10 a. Noso Textiles
Pro Forma Income Statement
December 31, 2016
($ thousands)
2015 (1 + g) Pro Forma
Sales $36,000 (1.15) $41,400
Operating costs (32,440) (1.15) (37,306)
EBIT $ 3,560 $ 4,094
Noso Textiles
Pro Forma Balance Sheet
December 31, 2015
($ thousands)
Pro Forma
After
2015 (1 + g) Additions Pro Forma Financing Financing
Cash $ 1,080 (1.15) $ 1,242 $ 1,242
Accounts receivable 6,480 (1.15) 7,452 7,452
Long-term debt 3,500 3,500 3,500
Total debt $12,800 $13,880 $16,008
Common stock 3,500 3,500 3,500
Principles of Finance 6e Chapter 8
Besley/Brigham
8-9
b. Δ interest expense = $2,128 x 0.10 = $213.
1st Pass Financing 2nd Pass
2016 Feedback 2016
Sales $41,400 $41,400
1st Pass Financing 2nd Pass
2016 Feedback 2016
Total assets $33,534 $33,534
Accounts payable $ 4,968 $ 4,968
8-11 a.
=== 5.2
320,4$
800,10$
EBIT
profit Gross
DOL
320,4$
320,4$
EBIT
−
440,1$
880,2$320,4$
I–EBIT
b. DOL = 2.5; so for every 1 percent change in sales, EBIT will change by 2.5 percent. DFL = 3.0;
Chapter 8 Principles of Finance 6e
Besley/Brigham
8-10
c. Van Auken can reduce its total leverage by reducing the degree of operating leverage, the
8-12 a., b., & c. Woods Company
Pro Forma Income Statement
December 31, 2016
($ thousands)
AFN
2015 (1 + g) 1st Pass Effects 2nd Pass
Sales $8,000 (1.2) $9,600 $9,600
Operating costs (7,450) (1.2) (8,940) (8,940)
EBIT $ 550 $ 660 $ 660
Woods Company
Pro Forma Balance Sheet
December 31, 2016
($ thousands)
AFN
2015 (1 + g) 1st Pass Effects 2nd Pass
Cash $ 80 (1.2) $ 96 $ 96
Principles of Finance 6e Chapter 8
Besley/Brigham
8-11
Accounts payable $ 160 (1.2) $ 192 $ 192
Accruals 40 (1.2) 48 48
*See income statement, 1st pass.
**2015 CA/CL = $1.040/$452 = 2.3; D/A = ($452 + $1,244)/$4,240 = 40%; to keep these ratios the
same, the following would exist:
Maximum total debt = 0.4 x $5,088 = $2,035
8-13 a. 8,000 units 18,000 units
Sales ($25/watch) $200,000 $450,000
Chapter 8 Principles of Finance 6e
Besley/Brigham
8-12
c.
1.33– =
$60,000–
$80,000
=
$140,000 – $15) – 8,000($25
$15) – 8,000($25
=
DOL units 8,000
d. If the selling price rises to $31, while the variable cost per unit remains fixed, P – V increases to
$16.
$140,000
F
e. If the selling price rises to $31 and the variable cost per unit rises to $23, P – V falls to $8.
$140,000
F
Revenues
Total
Operating
Costs
Fixed Costs
SOpBE
QOpBE
Profit
Loss
($ thousands)
Output (thousands)
0
100
200
300
400
500
600
700
800
0 5 10 15 20 25 30
8-14 a. 5,000 units 12,000 units
Income ($45/unit) $225,000 $540,000
b.
OpBE
F $175,000
= = = 7,000 units
QP – V $45 $20
−
8-15 a. December January February
Cash sales $160,000 $40,000 $60,000
Credit purchases 40,000 40,000 40,000
Cash Receipts:
Net cash flow for the month $ 1,200 $( 6,800) $13,200
Beginning cash balance 400 1,600 (5,200)
b. If the company began selling on credit on December 1, then it would have zero receipts during
December, down from $160,000. Thus, it would have to borrow an additional $160,000, so its