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Fella
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| Posted: 25 Apr 2012 at 11:33 | IP Logged
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I came across two MC that I have hard time to understand:
1. A coat company estimates that 60,000 special zippers
will be used in the manufacture of men's jackets during
the next year. Zipper manufacturer quoted a price of
$0.60 per zipper. Coat company would prefer to purchase
5,000 units per month, but zipper manufacturer is unable
to guarantee this delivery schedule. In order to ensure
availability of these zippers, coat company is
considering the purchase all 60,000 units at the
beginning of the year. Assuming coat company can invest
cash at 8% the company's opportunity cost of purchasing
the 60,000 units at the beginning of the year is?
$1,320
Calculation: 60,000 x 0.60 = 36,000 - 3,000 ->(5000x0.6)
= 33,000 cash payment x 0.08 = 2640 ( I understand this
calculation up until here)
then the correct answer keeps going:
2640 / 2 = 1,320 weighted average of payments.
Why is the opportunity cost weighted average? In other
similar questions they do not calculate (50%). I don't
understand why it is divided by 2???? Anyone???
2. A company currently has 1000 shares of common stock
outstanding with 0 debt. It has the choice of raising an
additional $100,000 by issuing 9% long-term debt, or
issuing 500 shares of common stock. The company has a 40%
tax rate. What level of earnings before interest and
taxes (EBIT) would result in the same earnings per share
(EPS) for the two financing options?
Answer: An EBIT of $27,000 would result in EPS of $10.80
Calculation: Equity:
EBIT &n bsp; 27,000
-Interest expense 0
Operating income 27,000
Taxes 40% (10,800)
Net Income 16,200
Shares outstanding 1,500
EPS &nb sp; 10.80
Debt financing:
EBIT &n bsp; 27,000
Interest expense (9,000) (100,000 x 0.09)
Operating income 18,000
Taxes 40% (7,200)
Net Income 10,800
Shares outstanding 1,000
EPS &nb sp; 10.80
how did they get 27,000?
Thank you.
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astone
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Joined: 23 Mar 2011
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| Posted: 25 Apr 2012 at 23:30 | IP Logged
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Total Payments: 60,000 * .60 = 36,000 (less: month 1 - 3,000) (They had to buy month 1 anyway) = 33,000
Interest Lost: 33000 * .04 (half year) = 1,320
1 3,000 - -
2 3,000 0.08 220
3 3,000 0.08 200
4 3,000 0.08 180
5 3,000 0.08 160
6 3,000 0.08 140
7 3,000 0.08 120
8 3,000 0.08 100
9 3,000 0.08 80
10 3,000 0.08 60
11 3,000 0.08 40
12 3,000 0.08 20 36,000 1,320
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jgrfan
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| Posted: 26 Apr 2012 at 12:30 | IP Logged
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Can't take credit for this - found it on another site - great stuff
Set EBIT from each scenario belwo equal to each other and solve.
EPS Equity = EBIT * (1-t) / # of shares in equity scenario
EPS Debt = ((EBIT - Int) *(1-t)) / # of shares in debt scenario
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Fella
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Location: United States
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| Posted: 26 Apr 2012 at 12:50 | IP Logged
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astone, thank you so much. Now that you spelled it out it
makes more sense. I would have never come up with that kind
of calculation on my own. It's stressful to think that
questions like these could be on the exam and you stress
even more because you don't have enough time. Thank you
very much.
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Fella
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Posts: 68
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| Posted: 26 Apr 2012 at 12:55 | IP Logged
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jgrfan, could you please give me the website where you got
this calculation from? thanks a lot
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