Deck 15: Analysis and Impact of Leverage

Question 1

Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology research.in sets of 1,000 tubes.Fixed costs including depreciation associated with the project are $2,000,000, variable cost per set is $16.Excom expects to sell 250,000 sets.What is the minimum price it can charge and reach the accounting break-even point?

A)$8
B)$12
C)$24
D)$20

Answer 1

C

Question 2

Accounting break-even analysis uses -

A)free cash flows over the entire life of a project.
B)sales, variable costs and fixed costs over the entire life of a project.
C)sales, variable costs and fixed costs for a single period.
D)free cash flows for a single period.

Answer 2

C

Question 3

Miller River Light is evaluating a project that will require an initial investment of $350,000.Miller River uses a 12% discount rate for capital projects of this type.What level of operating cash flows over a period of 5 years will cause the project to reach break-even NPV? Assume cash flows come in the form of an end-of-the-year annuity.

A)$70,000.00
B)$97,093.41
C)$92,329.12
D)$86,690.54

Answer 3

B

Question 4

Everything Donut plans to sell donuts at a local farmer's market.The permit and space rental will cost them $2,000 for the June through August season.The donuts will sell for $7.00 per dozen.Ingredients and overhead average $4.00 per dozen.They also have to pay five percent of her gross sales to the markets' organizers.How many dozens of donuts will they need to sell to cover fixed costs and realize a $3,000 profit?

A)752 dozen
B)1,667 dozen
C)1,887 dozen
D)1,250 dozen

Question 5

Bippert's farm is evaluating a proposal to plant 5,000 apple trees at an initial cost of $10,000.The trees will be sold in 5 years.What is the minimum after-tax cash flow from selling the trees that will allow the tree planting project to reach break even NPV? Use a discount rate of 12%.

A)$12,000.00
B)$5,674.26
C)$17,623.42
D)$17,958.56

Question 6

Everything Donut plans to sell donuts at a local farmer's market.The permit and space rental will cost her $2,000 for the June through August season.The donuts will sell for $7.00 per dozen.Ingredients and overhead average $4.00 per dozen.They also have to pay 5% of her gross sales to the markets' organizers.How many dozens of donuts will she need to sell to cover her fixed costs?

A)755 dozen with a very small profit on the last dozen.
B)667 dozen with a very small profit on the last dozen.
C)301 dozen
D)They can never break even.

Question 7

July sales for Amherst Arcade equal $100,000, variable costs equal $60,000 and fixed costs, including depreciation of $20,000, total $60,000.Which of the following is correct?

A)Amherst Arcade broke even with respect to net income.
B)Amherst Arcade broke even with respect to cash.
C)Amherst Arcade fell $20,000 short of cash break-even.
D)Amherst Arcade broke even with a $20,000 surplus.

Question 8

Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.Depreciation expense of $2,500,000 is included in fixed costs.The worst-case forecast calls for sales of 240,000 valves, the best-case for $290,400.Will MM reach cash break-even in the worst-case scenario?

A)Sales will fall short of cash break-even by $8,666,667.
B)The product will exactly break even.
C)Sales will fall short of cash break-even by $2,000,025.
D)Sales will exceed cash break-even by $2,166,667.

Question 9

Variable cost for Light.com's fluorescent tubes is $12.50, and the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.What is the break-even quantity for the fluorescent tubes?

A)600,000
B)1,000,000
C)375,000
D)7,500,000

Question 10

[blank] occurs when a portion of the company's assets are financed with securities, such as debt and preference shares, which pay a fixed amount of return to investors.

A)Financial leverage
B)Operating leverage
C)Premium leverage
D)Fixed leverage

Question 11

Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.$500,000 in depreciation expense is included in fixed costs.What is the cash break-even quantity for the fluorescent tubes?

A)933,333
B)1,000,000
C)375,000
D)1,066,667

Question 12

The Buffalo Philharmonic Orchestra is planning to present performances on two consecutive nights in January.It will cost them $5,000 per night for musicians, theatre rental, and event insurance.The theatre will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?

A)1000 tickets
B)1,112 tickets
C)1,223 tickets
D)There is not enough information

Question 13

The Buffalo Philharmonic Orchestra is planning to present performances on two consecutive nights in January.It will cost them $5,000 per night for the musicians, theatre rental and event insurance.The theatre will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to break even?

A)1000 tickets
B)1,112 tickets
C)1,223 tickets
D)There is not enough information

Question 14

In the fourth year of the Vidler Project, expected revenues will be $4,750,000, variable costs will be $4,000,000, depreciation expense $180,000 and fixed cash costs $570,000.Which of the following is true?

A)Accounting income equals $0.00
B)Free cash flow equals $180,000
C)Free cash flow equals 0
D)Both A and B are true.

Question 15

Garcia Developers will erect a small office building at a cost of $4,500,000.They have a client who will lease the space for 5 years at a price that will produce free cash flows of $150,000 per year.For approximately how much would they need to sell the building for at the end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for projects of this type.

A)$3,750,000
B)$5,755,936
C)$6,331,530
D)$6,964,683

Question 16

Project Zeta is expected to produce after-tax cash flows of $30 million in year 1, $40 million in year 2 and $50 million in year 3.If the company uses a 12% required rate of return, what is the most it can invest in this project and break even with respect to NPV?

A)$69.03 million
B)$94.26 million
C)$1,11 million
D)$120 million

Question 17

At the break-even NPV point,

A)the present value of operating cash flows equals the initial amount invested.
B)the NPV of the project is equal to zero.
C)the project's IRR is equal to the project's required rate of return.
D)All of the above.

Question 18

DNATECH has developed a hair growth treatment at a cost of $10 million.They can license the technology to another company for a period of 10 years.What is the minimum annual free cash flow they could accept in order to reach break-even NPV on this product? Use a discount rate of 8%.

A)$1,490,295
B)$1,639,324
C)$1,108,000
D)$1,000,000

Question 19

Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.The worst-case forecast calls for sales of 240,000 valves, the best-case for 290,400.Will MM reach accounting break-even in the worst-case scenario?

A)Sales will fall short of break-even by $8,666,667.
B)The product will exactly break even.
C)Sales will fall short of break even by $5,000,025.
D)Sales will exceed break even by $58,000,000.

Question 20

Brookfield Heavy Equipment is considering a project that will produce after-tax cash of $40,000 per year for 5 years.The project will require an initial investment of $144,191.At what discount rate will the project reach break-even NPV?

A)8%
B)10%
C)12%
D)11.11%

Question 21

Quineboag Textiles Inc.has calculated its degree of operating leverage at 3.00.If Quineboag can increase sales from $5,000,000 to $5,250,000, operating income should increase from $500,000 to -.

A)$515,000
B)$650,000
C)$1,500,000
D)$575,000

Question 22

Charlestown Marina's forecasts indicate that if slip rentals equal $500,000, net operating income will be $25,000 and if rentals equal $525,000, net operating income will be $37,500.What is Charletown's degree of operating leverage?

A)2
B)10
C).05
D).10

Question 23

Actual 2014 figures and forecasted 2015 figures are shown below for HEMOPath Labs
Compute HEMOPath's degree of operating leverage (DOL)in 2014.

Question 24

If Untel Inc.decides to manufacture a new generation of computer chips with a brief 2-year product life cycle, it expects to sell 1 million units each year.Variable cost per unit will be $75, fixed costs $5 million and depreciation $3 million.The initial investment will be $22.91 million.Untel uses a discount rate of 10%; its marginal tax rate is 40%.To reach break-even NPV, UNTEL must sell the chips for at least [blank] each.

A)$87
B)$105
C)$100
D)$1,000

Question 25

Charles River Publishing's degree of operating leverage is .5.To increase net operating income from $3,750,000 to $3,937,500, it will need to increase sales from $25,000,000 to -.

A)$37,500,000
B)$27,500,000
C)$25,093,750
D)$26,250,000

Question 26

For a line of snowblowers sold by Arctic Equipment, fixed costs, including depreciation of $1,000,000, total $2,400,000.The snowblowers sell for $800 each.Variable costs of a snowblower are $500.Compute
a.accounting break-even
b.cash break-even

Question 27

Financial leverage can sometimes make a firm's earnings per share [blank].

A)higher
B)lower
C)A and B
D)plateau