Assignment:

Advanced Financial Management

1. A. Calculate DOL
Plan A ( 100,000 units)
Variable cost per unit = 1.5
Price: 2.00
Fixed cost: $25,000
[Quantity × ( Price−Variable cost per unit )]
DOL =
[ Quantity × ( Price−Variable cost per unit ) ]−¿ operating cost
[100,000 × ( 2−1.5 ) ]
= [ 100,000× ( 2−1.5 ) ]−25,000 =2

Meaning: when increasing (decreasing) by 1%, the sales of item A sold will increase
(decrease) 2% of profit before interest and tax
Plan B: ( 100,000)
Variable cos per unit : 1
Price: 2
Fixed cost: 70000
[Quantity × ( Price−Variable cost per unit )]
DOL =
[ Quantity × ( Price−Variable cost per unit ) ]−¿ operating cost
[ 100,000 × ( 2−1 ) ] 10
= = =3.33
[ 100,000× ( 2−1 ) ] −70 , 000 3
Meaning: when increasing (decreasing) by 1%, the sales of item A sold will increase
(decrease) 3.3% of profit before interest and tax
b. EBIT
* 100,000 -> 130,000: ∆ Q=30 %
% EBITa =2 * 30%= 0.6
%EBIT b = 3.3 *30% =0.99
 EBITa = 25,000 + 0.6 *25,000= 40,000
EBITb = 70,000 + 0.99 *70,000 = 139,300
 100,000 - 70,000: ∆ Q=30 %
%

2.
2.1
Debt/ capital ratio 40%
Tax rate 40%
Invested capital 200,000
Debt 80,000
Interest rate 5.8 %
Shares outstanding 6000

Plan B

Demand for product Probability EBIT EBIT(1- Interest Net ROE EPS
T) income
Terrible 0.05 (70,000) (42,000) 4,640 (44,784) (55,98) ($7.464)
Poor 0.2 (30,000) (18,000) 4,640 (20,784) % (3.464)
Normal 0.5 30,000 18,000 4,640 15,216 (25.98) 2.54
Good 0.2 90,000 54,000 4,640 51,216 % 8.54
Wonderful 0.05 130,000 78,000 4,640 75,216 19,02% 12.54
Expected value 30,000 18,000 4,640 15,216 64.02% 2.54
Standard devitation 94.02%
Coefficient of variation 18.64%