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Case – FIN501 Strategic Corporate Finance Assignment

Case – FIN501 Strategic Corporate Finance (2018: 2024 – Write My Essay For Me | Essay Writing Service For Your Papers OnlineSEP10FT-1)

Module 4 – Case
LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY
Assignment Overview
Before starting on this assignment, make sure to carefully review the background
readings. Part A requires you to make some computations, and Part B requires you
to analyze some scenarios using your knowledge of the concepts. So make sure to
go through the computational examples in the required readings and also thoroughly
review the key concepts before starting on this assignment.
Case Assignment
Part A: Quantitative Problems
1. Suppose QuickCharge Corporation manufactures phone chargers. They sell their
chargers for $20. Their fixed operating costs are $100,000 and their variable
operating costs are $10 per charger. Currently they are selling 30,000 chargers
per year.
A. What is QuickCharge’s EBIT (earnings before interest and
taxes) at current sales of 30,000?
B. What is QuickCharge’s breakeven point?
C. Calculate the EBIT if QuickCharge’s sales increase 50% to
45,000 chargers. What is the percent of change in EBIT
under this increase in sales? Also, calculate the EBIT if the
company’s sales decrease 50% to 15,000 chargers. What
is the percent of change in EBIT under this decrease in
sales?
D. What is QuickCharge’s degree of operating leverage?
Based on your computation, what does its operating
leverage say about QuickCharge’s business risk?
2. The StayDry Umbrella Corporation will have an EBIT of $100,000 if there is a
normal amount of rain this year. But if there is a drought, they will have an EBIT of
only $50,000. The interest rate on debt is 10%, and the tax rate is 35%. The
company does not pay any preferred dividends.
A. If StayDry has zero debt and 50,000 outstanding shares,
what will its EPS (earnings per share) be if there is normal
rain? What will its EPS be if there is a drought? What is its
DFL (degree of financial leverage)?
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B. Now suppose StayDry has decided to take on $300,000 in
debt and has used these funds to buy back half of the
outstanding shares so now there are only 25,000
outstanding shares. What is the new EPS and DFL for both
normal rain and drought?
C. Based on your answers to a) and b) above, what are the
trade-offs management has to make between zero debt or
$300,000 in debt? What are the benefits and
disadvantages of taking on this debt?
Part B: Conceptual Questions
1. For each of the following scenarios, explain whether the situation describes
financial risk or business risk. Explain your answers to each scenario using at
least one of the references from the background readings:
A. A pharmaceutical company has developed a new cancer
treatment drug that has a much higher success rate than
other drugs currently in the market. It has the potential to
triple the company’s profits. However, the FDA has
expressed concern about some side effects, and it is not
clear if the FDA will approve the drug.
B. An airline has an EBIT of $100 million per year. However, it
also has a huge amount of debt and pays $97 million per
year in interest. Its EBIT is relatively stable but tends to go
up or down by $5 million or so each year depending on the
economy.
C. A basketball franchise earns an EBIT of $50 million a year
when its team has a winning year. However, it earns only
$10 million when its team has a losing year.
2. Explain what capital structure theory (or theories) best describes the following
situations. Make sure to cite at least one of the required textbook chapters for
each answer, and to cite at least two references for this section:
A. A CEO decides to borrow $50,000 in new debt, and the
share prices rise dramatically. He then decides to sell half
of his own personal shares, and when this is reported in
the Wall Street Journal, the share prices drop dramatically
in value.
B. The corporate tax rate rises from 35% to 45%, and the
XYZ Corporation decides to issue more debt. A year later,
bankruptcy laws are changed to become much stricter and
costlier. XYZ then decides to pay back half of its debt.
C. A CEO named Joe Bigwig is known for living large with
very expensive cars and a huge mansion. Joe is seeking a
large loan from a bank to finance some new projects for his
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corporation. However, the bank becomes concerned when
they find out that he recently used company funds to buy a
brand-new company jet and also schedules numerous
business trips to Hawaii and stays in five-star hotels. The
bank tells Joe he will receive the loan only if he agrees to
scale back on his personal expenses and not give himself
or any other executives a raise until the loan is paid back.
Assignment Expectations
Answer the assignment questions directly.
Stay focused on the precise assignment questions. Do not go off on tangents or
devote a lot of space to summarizing general background materials.
For computational problems, make sure to show your work and explain your
steps.
For short answer/short essay questions, make sure to reference your sources of
information with both a bibliography and in-text citations. See the Student Guide
to Writing a High-Quality Academic Paper, including pages 11-14 on in-text
citations. Another resource is the “Writing Style Guide,” which is found under “My
Resources” in the TLC Portal.

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