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# DividendPolicy,and WorkingCapitalManagement

Part 5 CapitalStructure,

## be sold at \$13.98each,variableoperatingcostsare \$10.48per CD, and annualfixed

operating costs are \$73,500.
a. Find the operating break-even point in the number of CDs.
b. Calculate the total operating costs at the break-evenvolume found in Part a,
c. If TA Global estimatesthat at a minimum they can sell2,000 CDs per month,
should they go into the music business?
d. How much EBIT will TA Global realize if they sell the minimum 2,000CDs
per month as noted in Part c?
1s-8

POINT-CHANGINGCOSTS/REVENUES
BREAK-EVEN
JBG Publishers publishes
Last year the book of puzzles sold for \$10 with variable
CreatiaeCrossutords.
operating cost per book of \$8 and fixed operating costs of \$40,000.How many
books must ]BG sell this year to achieve the break-even point for the stated
operating costs,given the following different circumstances:
a. All figures remain the same as for last year.
b. Fixed operating costs increaseto \$44,000;all other figures remain the same.
c. The selling price increasesto \$L0.50;all costsremain the sameas for last year.

15-9

## EFFECTSThe Nylex Company wants to estimate next

FINANCIALLEVERAGE
year's return on equity (ROE) under different financial leverage ratios. Nylex's
total capital is \$14 million, it currently uses only common equity, it has no future
plans to use preferred stock in its capital structure,and its corporatetax rate is 40%,
The CFO has estimated next year's EBIT for three possible states of the world:
\$4.2milton with a 0.2 probability, \$2.8million with a 0.5 probability, and \$700,000
with a 0.3 probability. Calculate Nylex's expectedROE, standard deviatiory and
coefficientof variation for eachof the following debt-to-capitalratios; then evaluate
the results:
Debt/Capital Interest
Rat
Ratio
0o/o
10
50
60

9o/o
11
14

15-10

## HAMADA EQUATION Penta Software is trying to establish its optimal capital

structure. Its current capital structure consists of 25% debt and 75% equi\$;
however, the CEO believesthat the firm should use more debt, The risk-free rate,
rs3, is 5o/";the market risk premium, RP14,is 6oh;and the firm's tax rate is 40%,
Currently, Penta'scost of equity is 14o/",which is determined by the CAPM. Vfhat
would be Penta'sestimated cost of equity if it changed its capital structure to 50%
debt and 50% equity?

\$-{

## RECAPITALIZATIONTambun Rambutan Plantations currently has total capital

equal to \$5 million, has zero debt, is in the 40% corporate tax bracket, has a net
income of \$1 million, and distributes 40% of its earnings as dividends. Net
income is expectedto grow at a constantrate of 5'/' per year,200,000sharesof
stock are outstanding, and the current WACC is 1'3.40%.
The company is considering a rccapitalization where it will issue \$L million in debt and use the proceeds to repurchase stock. Investment bankers
have estimated that if the company goes through with the recapitalization,its
before-tax cost of debt will be 1.1.%and its cost of equity will rise to 1.4.5%,
a. \Atrhatis the stoik's current price per share (before the recapitalization)?
b. Assuming that the company maintains the samepayout ratio, what will be its
stock price following the recapitalization?Assume that sharesare repurchased
at the price calculated in Part a.