Fin 534 Homework Set 5 Week 10 Solution Essay

735 Words Dec 13th, 2015 3 Pages
FIN 534 Homework Set 5 Week 10 Solution

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FIN 534 – Homework Set #5 Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points. Use the following information for Questions 1 through 3: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected
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This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.
5. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not?
6. Would the firm’s break-even point increase or decrease if it made the change?
Use the following information for Questions 7 and 8: Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B (in thousands of dollars). Firm A Firm B Current assets $150,000 $120,000 Fixed assets (net) 150,000 180,000 Total assets $300,000 $300,000

Current liabilities $20,000 $80,000 Long-term debt 80,000 20,000 Common stock 100,000 100,000 Retained earnings 100,000 100,000 Total liabilities and equity $300,000 $300,000

Earnings before interest and taxes for both firms are $30 million, and the effective federal plus-state tax rate is 35%.
7. What is the return on equity for each firm if the

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