Total assets $100,000 Debt (12% interest rate) $80,000 Equity $20,000 Variable c
ID: 2699865 • Letter: T
Question
Total assets
$100,000
Debt (12% interest rate)
$80,000
Equity
$20,000
Variable costs of production
$14 per unit
Fixed cost of production
$27,000
Units Sold
12,300
Sales price
$19.75 per unit
Sales
$200
Expenses
$185
Tax rate
33% of earnings
Assets, Liabilities and Equity as of xx/xx/xx
Assets
Liabilities and Equity
Accounts receivable
$1,300
Accounts payable
$1,200
Inventory
1,600
Long-term debt
2,500
Plant
1,700
Equity
900
Total
$4,600
Total
$4,600
The firm earns 20 percent on sales and expects those sales to rise to $5,500. The increased sales may require additional financing. Accounts receivable and inventory will increase, and trade accounts will also spontaneously increase with the increase in sales. Management expects to distribute 75% of earnings.
Total assets
$100,000
Debt (12% interest rate)
$80,000
Equity
$20,000
Variable costs of production
$14 per unit
Fixed cost of production
$27,000
Units Sold
12,300
Sales price
$19.75 per unit
Explanation / Answer
1) New units sold = 1.1*12300 = 13530 ;
Operating Profit = (19.75 -14)*13530 - 27000 = $50797.5 ;
Operating Profit Increases to $50797.5
Net Profit = OP - Interest = 50797.5 - 0.12*80000 = $41,197.5
Original Operating Profit = (19.75-14)*12300 - 27000 = $43725 ;
%increase of operating profit = 16.17 % ;
Original Net Profit = OP - 0.12*80000 = $34125
%increase in Net Profit = 20.725 %
2) Profit before tax = $15
Net Profit after tax= Earnings = 15*(1-0.33) = $10.05 ;
Interest to be paid = 40*0.1 = $4 ;
Profit before tax = 15 - 4 = $11 ;
Earnings = 11*(1-0.33) = $7.37 ;
Returns in first case = 10.05/100 = 10.05 % ;
Returne in second case = 7.37/60 = 12.28 % ;
It is because returns on earnings is higher than interest rate paid on debt.
If Expense = $194 ;
Returns (I case) =6*(1-0.33)/100 = 4.02 %
Returns (in second case) = (6-4)*(1-0.33)/60 = 2.23 %
In second case returns declined more ;
this is because when expenses rise , profit is less so return is also less ; now rate of return is less than interest rate paid on debt if expenses rise to $194 that is why we will waste much money in paying interest ; hence return would be low