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Tutorial Set 3

This document contains a tutorial set with questions on business finance concepts including: 1) Calculating the breakeven level of units and contribution per unit for a laptop trading business with given fixed, variable and selling costs. 2) Calculating the minimum price per unit for a pen drive supply business to breakeven given fixed setup costs and variable costs per unit, with a known number of customers. 3) Calculating the minimum contribution per unit needed for a project to breakeven given fixed startup costs, total variable costs, and number of production units. 4) Advising a company on whether to pursue debt or equity financing by calculating EPS outcomes for both options and the EBIT level that

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15 views2 pages

Tutorial Set 3

This document contains a tutorial set with questions on business finance concepts including: 1) Calculating the breakeven level of units and contribution per unit for a laptop trading business with given fixed, variable and selling costs. 2) Calculating the minimum price per unit for a pen drive supply business to breakeven given fixed setup costs and variable costs per unit, with a known number of customers. 3) Calculating the minimum contribution per unit needed for a project to breakeven given fixed startup costs, total variable costs, and number of production units. 4) Advising a company on whether to pursue debt or equity financing by calculating EPS outcomes for both options and the EBIT level that

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6kjmf82979
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DEPARTMENT OF FINANCE

FINC 301: INRODUCTION TO BUSINESS FINANCE


TUTORIAL SET 3

1. You recently realized that Dell laptops are very durable but are scarcely been used by
students, therefore you decide to start a laptop trading business on UG campus. Your initial
trials to supply the laptops yielded a total variable cost of GHS 60,000 for 20 pieces. Per
sentiments from the market, the laptops can be sold at twice the variable cost per unit. The
fixed cost of setting up the business is GHS 24,000.
a. What is the anticipated breakeven level for units of laptops that must be sold
b. What is the contribution per unit of laptop sold

2. If you just found out that only 1000 students will be patronizing your pen drive supply
business that amounted to a non-variable cost of GHS 5000 to set up and runs with a
variable cost of GHS20 per pen drive, what should be the minimum price per pen drive for
you to breakeven at the 1000 customers given the cost elements?

3. Suppose you are facing a fixed startup cost of GHS 2.83million and total variable cot of
GHS 1.37million for a project you want to implement, what is the minimum contribution
per unit (rounded to two decimal places) that will allow you to breakeven at 120,000 units
of production?

4. A company has estimated EBIT for a forecasted period to be GHS140,000. The current
shares outstanding for the firm is 30,000 units and priced at GHS 120 per share. The firm
is unsure whether to go for debt or equity. Debt is available at interest of 20% per annum.
Note that the firm falls in the 35% tax bracket. Advise the firm.
a. What would be the outcome of EPS if the firm were to pursue debt financing?
b. What would be the outcome of EPS if the firm were to pursue equity financing?
c. What is the EBIT level that would generate identical EPS for the two financing options
and thus make the firm indifferent as to the choice of debt or equity?

5. TRUE or FALSE?
a. To calculate the present value of $1 million received in year 10, you need to divide by
the 10-year discount factor.
b. The present value of $1 million received in year 10 is less than $1 million.
c. Other things equal, the higher the interest rate, the greater is the present value of a
future cash flow.
d. Other things equal, the lower the interest rate, the greater is the future value.
e. Other things equal, the higher the interest rate, the greater is the future value.
f. Other things equal, the lower the discount factor, the greater is the future value.
g. Other things equal, the higher the discount factor, the greater is the future value.
h. If current assets are $20,000, where inventory is $5,000, and total liabilities are
$50,000, the current ratio is 0.40.
i. Tom invests $10,000 to start a new firm. He knows that the debt to total assets ratio
will be 0.40. Tom also expects a net profit margin of 9% and a total asset turnover rate
of 2. Tom should expect a return on equity of 30%
j. Cash planning is part of long-term financial planning
k. If the net profit margin for a firm is 11.2% and the net earnings are $83,000, then the
sales must be $741,071
l. The more debt a company has the worse the company is.
m. Nafisah runs a small bakery, which is open every day. Her annual sales are $600,000,
of which 75% are cash sales. If she wants to obtain a 10-day average collection period,
her average accounts receivable balance must be $4,110.

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