Question 1 (Break-even point and selling price) Parks Casting Inc. will manufacture and sell 210,000 units next year. Fixed costs will total $300,000 and variable costs will be 50 percent of sales.

a.       The firm wants to achieve a level of earnings before interest and taxes of $260,000. What selling price per unit is necessary to achieve this result?

 b.      Set up an analytical income statement to verify your solution to part (a) 

Question 2 (Break-even point operating leverage) Footwear Inc. manufactures a complete line of men’s and women’s dress shoes for independent merchant. The average selling price of its finished product is $90 per pair. The variable cost for this same pair of shoes is $60. Footwear Inc. incurs fixed costs of $160,000 per year.

a.       What is the break-even point in pairs of shoes for the company?

b.      What is the dollar sales volume the firm must achieve to reach the break-even point?

c.       What would be the firm’s profit or loss at the following units of production sold:

4,000 pairs of shoes?  11,000 pairs of shoes?  18,000 pairs of shoes? 

Question 3 (Operating leverage) Rocky Mount Metals Company manufactures an assortment of wood burning stoves. The average selling price for the various units is $550. The associated variable costs is $350 per unit. Fixed costs for the firm average $118,000 annually.

a.       What is the break-even point in units for the company?

b.      What is the dollar sales volume the firm must achieve to reach the break-even point?

c.       What is the degree of operating leverage for a production and sales level of 5,000 units for the firm? Calculate to three decimal places

d.      What will be the projected effect on earnings before interest and taxes if the firm’s sales level should increase by 40 percent from the volume noted in part ©? 

Question 4 (Residual dividend policy)FarmCo, Inc follows a policy of paying out cash dividends equal to the residual amount that remains after funding 50 percent of it planned capital expenditures. The firm tries to maintain a 50 percent debt and 50 percent equity capital structure and does not plan on issuing more stock in the coming year. FarmCo’s CFO has estimated that the firm will earn $13 million in the current year.

a.       If the firm maintains its target financing mix and does not issue any equity next year, what is the most it could spend on capital expenditures next year given its earnings estimate?

b.      If FarmCo’ capital budget for next year is $10 million, how much will the firm pay in dividends and what is the resulting dividend payout percentage? 

Question 5 (Constant dollar dividend payout policy) Parker Prints is in negotiation with two of its largest customers to increase the firm’s sales dramatically. The increase will require that Parker expand its production facilities at a cost of $20 million. Parker expects to pay out $8 million in dividends to its shareholders next year. Parker maintains a 40 percent debt in its capital structure.

a.       If Parker earns $18 million next year, how much common stock will the firm need to sell in order to maintain its target capital structure?

b.      If Parker wants to avoid selling any new stock, how much can the firm spend on new capital expenditures? 

Question 6 (Stock dividends)in the spring of 2014 the CFO of Placebo Pharmaceutical Inc. took a proposal to the firm’s board of directors to distribute a noncash dividend to the firm’s shareholders in the form of new shares of common stock. Specifically, the CFO proposed that the company pay 0.015 shares of stock to the holders of each share of common stock that the holder of 1,000 shares of stock would receive an additional 15 shares of common stock.

a.       If placebo had total net income for the year of $10,000,000 and 21,000,000 shares of common stock outstanding before the stock dividend, what are the firm’s earnings per share?

b.      After paying the stock dividend, what are the firm’s earnings per share? 

c.       If you owned 1,000 shares of stock before the stock dividend, how many dollars of earnings did the firm earn on your 1,000 share investment? After the stock dividend is paid, how many dollars of earnings did the firm earn on your larger share holding? What effect would you expect from the payment of the stock dividend on your total investment in the firm? 

Question 7 (Stock dividends)The Dunn Corporation is planning to pay dividends of $480,000. There are 240,000 shares outstanding, and earnings per share are $6. The stock should sell for $52 after the ex-dividend date. If, instead of paying a dividend, the firm decides to repurchase stock.

a.       What should be the repurchase price/

b.      How many shares should be repurchased?

c.       What if the repurchase price is set bellow or above your suggested price in part (a)?

d.      If you own 100 shares, would you prefer that the company pay the dividend or repurchase stock?