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krok68 [10]
3 years ago
8

. Gibson Company sales for the year 2019 were $4.5 million. The firm’s variable operating cost ratio was 0.45 and fixed costs (t

hat is, overhead and depreciation) were $1 million. Its average (and marginal) income tax rate is 25 percent. Currently, the firm has $2.4 million of long-term bank loans outstanding at an average interest rate of 12 percent. The remainder of the firm’s capital structure consists of common stock (110,000 shares outstanding at the present time). a. Calculate Gibson’s degree of combined leverage for 2019. b. Gibson is forecasting a 15 percent increase in sales for this year (2020). Furthermore, the firm is planning to purchase additional labor-saving equipment which will increase fixed costs by $200,000 and will reduce the variable cost ratio to 0.42. Financing this equipment with debt will require additional bank loans of $900,000. Calculate Gibson’s expected degree of combined leverage for 2020. c. Determine how much Gibson must reduce its interest expenses in 2020 (for example, through the sale of common stock) to maintain its DCL at the 2019 level. d. Assuming that the debt is permanent (or perpetual) what is the reduction in debt associated with the interest expense reduction in part c?
Business
1 answer:
MariettaO [177]3 years ago
8 0

Answer:

See solutions below

Explanation:

1. The degree of combined leverage

= (Sales - Variable costs) / EBIT - Interest

Sales = $4.5 million

Variable costs = 0.45 × $4.5 million

= $2,025,000

EBIT = $4,500,000 - $2,025,000 - $1,000,000

= $1,475,000

Interest = 12% × $2,400,000

= $288,000

Therefore,

DCL = [$4,500,000 - $2,025,000] / $1,475,000 - $288,000

= $2,475,000 / $1,187,000

= 2.09

2. Gibson expected degree of leverage

Sales = 15% × $4.5 million

= $5,175,000

Fixed cost = $200,000 + $1,000,000

= $1,200,000

Variable cost = $0.42 × $2,025,000 - $2,025,000

= $2,025,000 - $850,500

= $1,174,500

EBIT = $5,175,000 - $1,174,500 - $1,200,000

= $2,800,500

Interest = $2,400,000 + $900,000

= 12% × $3,300,000

= $396,000

DCL = $5,175,000 - $1,174,500 / $2,800,500 - $396,000

= $4,000,500 / $2,404,500

= 1.66

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Answer:

the average amount of money is 1,165

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The computation of the average amount of money i.e. earned by each theater is shown below:

= Total number of tickets sold ÷ number of theaters

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And, the number of theaters is 755

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2 years ago
Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following ann
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Answer:

Pecan Theatre Inc.

Average annual percentage return

                              Cost    Market   20Y1   20Y2  20Y3  20Y4  20Y5  20Y6

                                 per share

Preferred stock   $20.00 $25.00    2%        2%       2%      2%      2%      2%

Common stock    $15.00  $17.50    0%         0%       0%   0.7%   0.8%   0.11%

Explanation:

a) Data and Calculations:

Dividends:                              Cumulative               Common Stock

                                         Preferred Stock               Dividends

                                    Dividends   Per share                   Per share

20Y1,     $80,000           $80,000   $0.40                 $0           $0

20Y2,    $90,000             90,000   $0.40                   0           $0

20Y3,   $150,000           150,000   $0.40                   0           $0

20Y4,   $150,000           100,000   $0.40              50,000      $0.10

20Y5,   $160,000           100,000   $0.40             60,000       $0.12

20Y6,   $180,000           100,000   $0.40             80,000       $0.16

Average annual percentage return

                              Cost    Market   20Y1   20Y2  20Y3  20Y4  20Y5  20Y6

                                 per share

Preferred stock   $20.00 $25.00    2%        2%       2%      2%      2%      2%

Common stock    $15.00  $17.50    0%         0%       0%   0.7%   0.8%   0.11%

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Alexis, a customer service supervisor at ABC Airlines, typically seeks the full participation of her team members when planning,
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They should therefore work to reduce their Receivables Collection time.

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Answer:

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Commercial EVA 7,090.50

<u>Both are profitable</u>

<u />

Explanation:

The EVA (economic value added) is the result from subtracting the cost of capital of the investment to their divisional income. This will determinate if the division increase the company's capital or destroyed (as it return less than optimal/desired)

Consumer Income                     11,500

Investment: 35,500 + 4,200 = 39,700

EVA:     11,500 - 39,700 x 11% =  7,  133

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EVA: 11,925 - 43,950 x 11%   =  7090.5

Both division are profitable as they generate more income than the cost of the investment

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