14-1

What are financial markets? What function do they perform? How would an economy be worse off without them?

The institutions and procedures that assist in transactions in all types of financial claims are called financial markets and they report the prices for each good. Their purpose is to distribute the supply of savings from those economic units with a surplus to those with a deficit. Without the appropriate development of the financial market system the economy would have extreme difficulty. The financial market brings value to the economy. The rate of capital would basically be less as well the lack of expedient movement is stock contributions. When this happens all other aspects fall short as well e.g. buildings and equipment.

14-3

Distinguish between the money and capital markets.

Money markets facilitate transactions using short-term financial instruments.

Capital markets facilitate transactions using long-term financial instruments.

14-4

What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

There are few benefits that are appreciated due to organized security exchange. The continuous market has a reduced volatility in the price. As for establishing and publicizing fair security prices there is a intended auction-type determination of the price. When it comes to assisting businesses raise new capital the new firms get a leg up. Instead of having assigned prices the new firms have a spot to publicize security offerings which in turn will have the price subjected to a competitive determinant.

15-5A

(Leverage analysis) You have developed the following analytical income statement for your corporation. It represents the most recent year’s operation, which ended yesterday.

Sales $45,750,000

Variable costs 22,800,000

Revenue before fixed costs $22,950,000

Fixed costs9,200,000

EBIT $13,750,000

Interest expense 1,350,000

Earnings before taxes $12,400,000

Taxes (5.0) 6,200,000

Net Income $6,200,000

Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions:

  1. At this level of output, what is the degree of operating leverage?
  2. What is the degree of financial leverage?
  3. What is the degree of combined leverage?
  4. What is the firm’s break-even point in sales dollars?
  5. If sales should increase by 25%, by what percent would earnings before taxes (and net income) increase?

a.==1.67 times

b.===1.11 times

c.DCL 45,750,000=(1.67) (1.11)=1.85 times

d.S*===

==$18,326,693.23

e.(25%) (1.85)=46.25%

15-9A

(Fixed costs and the break-even point) A&B Beverages expects to earn $50k next year after taxes. Sales will be $375k. The store is located near the shopping district surrounding Blowing Rock University. Its average product sells for $27 a unit. The variable cost per unit is $14.85. The store experiences a 40% tax rate.

  1. What are the store’s fixed costs expected to be next year?
  2. Calculate the store’s break-even point in both units and dollars.

(a){S- (VC + F)} (1-T) = $50,000

= $50,000

[S – VC - } (1 – T) = $50,000

{$375,000 - $206,250 – F} (0.6) = $50,000

($168,750 - F) (0.6) = $50,000

F = $85,416.67

(b)QB = = = = 7,030 units

S* = = = $189,815

15-13A

(Break-even point and operating leverage) Allison Radios manufactures a complete line of radio and communication equipment for law agencies. The average selling price of its finished product is $180 per unit. The variable cost for these same units is $126. Allison Radios incurs fixed costs of $540k per year.

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

= 10,000 units

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

= 10,000 × $180

= $1,800,000

c. What would be the firm's profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?

Allison Radios
Unit
Sales / Price / Total
Sales / Fixed
Costs / Unit
Variable Cost / Total
Variable Costs / Total
Costs / Total Profit (Loss)
12000 / $180 / $2,160,000 / $540,000 / $126 / $1,512,000 / $2,052,000 / $108,000
15000 / $180 / $2,700,000 / $540,000 / $126 / $1,890,000 / $2,430,000 / $270,000
20000 / $180 / $3,600,000 / $540,000 / $126 / $2,520,000 / $3,060,000 / $540,000

d. Find the degree of operating leverage for the production and sales levels given in part c.

Units / Contribution Margin / EBIT / DOL
12000 / $648,000 / $108,000 / 6
15000 / $810,000 / $270,000 / 3
20000 / $1,080,000 / $540,000 / 2