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Task 1: Dime a Dozen Diamonds produces synthetic diamonds through treating carbon. Each diamond can be sold for $120. The materials cost for a standard diamond is $70. The fixed costs acquired each year for factory upkeep and administrative expenses are $215,000. The machinery costs $2.3 million and is depreciated straight-line over 10 years to a salvage value of zero.

a. What is accounting break-even level of sales in terms of number of diamonds sold?

b. What is NPV break-even level of sales supposing a tax rate of 40%, a 10-year project life, and a discount rate of 10%?

Task 2: A company is investigating effect on its cost of capital with respect to tax rate. Assume there is a capital structure of 20% debt, 10% preferred stock, and 70% common stock. The cost of financing with retained earnings is re = 12%, the cost of preferred stock financing is rPS = 7%, and the before-tax cost of debt is rd = 9%. Evaluate the weighted average cost of capital (WACC) given a tax rate of 35%.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M94239

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