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  • Leverage and Capital Structure Class Exercise - Solution

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    Ayustina Giusti
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    - The document provides information on break even point, EBIT, and leverage calculations for different sales quantities. - It calculates that the operating break even point is 21,000 units with a contribution margin of $3.50 per unit. - At 2,000 units sold, EBIT is $10,500, calculated using contribution margin. - Leverage examples show how changes in sales quantities affect revenue, costs, EBIT, earnings, and share price. - An optimal capital structure discussion analyzes different debt ratios, calculating EPS, WACC, and share price to determine the highest Po occurs at 30% debt ratio.

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    - The document provides information on break even point, EBIT, and leverage calculations for different sales quantities. - It calculates that the operating break even point is 21,000 units with a contribution margin of $3.50 per unit. - At 2,000 units sold, EBIT is $10,500, calculated using contribution margin. - Leverage examples show how changes in sales quantities affect revenue, costs, EBIT, earnings, and share price. - An optimal capital structure discussion analyzes different debt ratios, calculating EPS, WACC, and share price to determine the highest Po occurs at 30% debt ratio.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    24 views10 pages

    Leverage and Capital Structure Class Exercise - Solution

    Uploaded by

    Ayustina Giusti
    - The document provides information on break even point, EBIT, and leverage calculations for different sales quantities. - It calculates that the operating break even point is 21,000 units with a contribution margin of $3.50 per unit. - At 2,000 units sold, EBIT is $10,500, calculated using contribution margin. - Leverage examples show how changes in sales quantities affect revenue, costs, EBIT, earnings, and share price. - An optimal capital structure discussion analyzes different debt ratios, calculating EPS, WACC, and share price to determine the highest Po occurs at 30% debt ratio.

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    © All Rights Reserved
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    of 10

    BREAK EVEN POINT

    Price 13.98
    Variable Operating Cost 10.48
    Annual Fixed Operating Cost 73,500.00

    Operating Break Even Point

    Contribution Margin 3.50


    Operating Break Even Point 21,000.00

    Total Operating Cost at the Break Even Point

    Total Variable Operating Cost 220,080.00


    Total Operating Cost 293,580.00

    Total Sales Revenue 293,580.00


    Operating Profit -

    EBIT for 2,000 CDs

    Quantity Sold 2,000.00


    24,000.00

    Total Sales Revenue 335,520.00


    Total Variable Operating Cost 251,520.00
    Annual Fixed Operating Cost 73,500.00
    EBIT 10,500.00

    SAME!
    also can calculate with,
    difference between quantity sold with operating break even point and multiply to contribytion margin
    10,500.00
    per unit
    per unit
    per annum

    unit per annum

    0, means total sales revenue same with the total operating cost

    per month
    per annum

    en point and multiply to contribytion margin


    LEVERAGE

    Changes in Quantity Sold -20.00%

    Quantity Sold 24,000.00


    Price per Unit 6.00

    Variable Operating Cost per Unit 3.50


    Annual Fixed Operating Cost 50,000.00
    Annual Interest Expense 13,000.00
    Annual Preferred Dividend 7,000.00

    Changes in Sales Revenue -20.00%

    Sales Revenue 144,000.00


    Operating Expenses
    Variable Operating Expenses 84,000.00
    Fixed Operating Expenses 50,000.00
    EBIT 10,000.00

    Changes in EBIT -60.00%

    Interest Expenses 13,000.00


    Tax (40%) (1,200.00)
    Net Income (1,800.00)
    Preferred Dividend 7,000.00
    Earnings Available for Common Stockholders (8,800.00)

    Changes in EAFCS -4500%

    b.
    Degree of Operating Leverage (DOL) 3.00
    Degree of Financial Leverage (DFL) 75.00
    Degree of Total Leverage (DTL) 225.00

    c.
    Additional Sales Quantity 15,000.00
    Changes in Sales Quantity 50.00%
    Changes in EBIT 150.00%

    Sales Revenue 270,000.00


    EBIT 62,500.00
    EAFCS 22,700.00
    base case
    20.00%

    30,000.00 36,000.00
    6.00 6.00

    3.50 3.50
    50,000.00 50,000.00
    13,000.00 13,000.00
    7,000.00 7,000.00

    20.00%

    180,000.00 216,000.00

    105,000.00 126,000.00
    50,000.00 50,000.00
    25,000.00 40,000.00

    60.00%

    13,000.00 13,000.00
    4,800.00 10,800.00
    7,200.00 16,200.00
    7,000.00 7,000.00
    200.00 9,200.00

    4500%

    another way= 225.00

    digunakan untuk mencari EAFCS dengan mengetahui Changes in EBIT

    sama!
    sama!
    22,700.00
    OPTIMAL CAPITAL STRUCTURE

    Capital Structure debt ratio (%) rd (%) # of Shares


    0.00% 0.00% 200,000.00
    15.00% 8.00% 170,000.00
    30.00% 9.00% 140,000.00
    45.00% 12.00% 110,000.00
    60.00% 15.00% 80,000.00

    Debt Ratio 0% 15%

    EBIT 2,000,000.00 2,000,000.00


    Less: Interest - 120,000.00
    EBT 2,000,000.00 1,880,000.00
    Taxes (@ 40%) 800,000.00 752,000.00
    Net Profit 1,200,000.00 1,128,000.00
    Less: Preferred Dividends 200,000.00 200,000.00
    Profits Available to Common Stockholders 1,000,000.00 928,000.00
    Number of Shares Outstanding 200,000.00 170,000.00
    EPS 5.00 5.46

    rs 12.00% 13.00%

    Po 41.67 41.99

    30% choose 30% bcause its have the highe


    the optimum capital structure
    other approach using WACC
    WACC
    Debt Weight 0% 15%
    Equity Weight 100% 85%

    Cost of Debt 0% 8%
    After-Tax Cost of Debt 0.00% 4.80%
    Cost of Equity 12% 13%

    WACC 12.00% 11.77%


    calculate the Firm Value
    EBIT (1-Tax) = NOPAT of company 1,200,000.00 1,200,000.00
    Value of the Firm 10,000,000.00 10,195,412.06
    rs (%) Total Assets Total Debt Interest Expense
    12.00% 10,000,000.00 - -
    13.00% 10,000,000.00 1,500,000.00 120,000.00
    14.00% 10,000,000.00 3,000,000.00 270,000.00
    16.00% 10,000,000.00 4,500,000.00 540,000.00
    20.00% 10,000,000.00 6,000,000.00 900,000.00

    30% 45% 60%

    2,000,000.00 2,000,000.00 2,000,000.00


    270,000.00 540,000.00 900,000.00
    1,730,000.00 1,460,000.00 1,100,000.00
    692,000.00 584,000.00 440,000.00
    1,038,000.00 876,000.00 660,000.00
    200,000.00 200,000.00 200,000.00
    838,000.00 676,000.00 460,000.00
    140,000.00 110,000.00 80,000.00
    5.99 6.15 5.75

    14.00% 16.00% 20.00%

    42.76 38.41 28.75

    % bcause its have the highest Po(share price)


    m capital structure

    30% 45% 60%


    70% 55% 40%

    9% 12% 15%
    5.40% 7.20% 9.00%
    14% 16% 20%

    11.42% 12.04% 13.40%


    we choose the lowest one, if we use wacc
    1,200,000.00 1,200,000.00 1,200,000.00
    10,507,880.91 9,966,777.41 8,955,223.88
    this, our Firm Value is the highest

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