Can someone please explain how to do these on a financial calculator? I have my

Question

Can someone please explain how to do these on a financial calculator? I have my final tomorrow.

Last year, Cayman Corporation had sales of $30,000,000, total variable costs of $13,500,000, and total fixed costs of $5,000,000. In addition, they paid $3,000,000 in interest to bondholders. Cayman has a marginal tax rate of 35 percent. If Cayman's sales increase by 15%, what should be the increase in operating income? O 23.8% O 21.5% O 20.3% 29.1% 18.3% Question 17 1 pts se ns Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 5% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing. $5,675,000 O $6,200,000 O $5,150,000 O $4.625,000 O $6,725,000

Explanation / Answer

DTL = (Revenue - VC) / (Revenue - VC - Fixed cost - Interest)

DTL = (30 - 13.5) / (30 - 13.5 - 5 - 3) = 1.94

% change in net income = DTL * % sales

= 1.94*15%

= 29.12% (Option D)

b)

Operating income = X

EPS should be same in both situations

All debt

EPS = (X - 10%*20000000 - 5%*15000000) / 500000 = (X - 2750000) / 500000

All equity

new shares = 15000000 / 75 = 200000

total shares = 500000 + 200000 = 700000

EPS = (X - 10%*20000000) / 700000 = (X - 2000000) / 700000

(X - 2000000) / 700000 = (X - 2750000) / 500000

200000*X = 700000*2750000 - 500000*2000000

X = 4625000 (Option D)

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