Financing Strategy Problems

In: Business and Management

Submitted By Aguillet
Words 256
Pages 2
1. Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell 10,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.)

A. What is the operating income (EBIT) for both firms?

Sales Revenue = 10000*2.5=25000
Variable cost = 10000*1=10000
Fixed cost = 12000


B. What are the earnings after interest?
Firm A Interest=0
Firm B Interest= 5000*10%=500
Earnings after interest for Firm A = $3000 - 0 = $3000
Earnings after interest for Firm B = $3000 – 500 = $2500 C. If Sales increase by 10% to 11,000 units, by what percentage will each firm’s earnings after interest increase? To answer the questions determine the earnings after taxes and compute the percentage increase in these earnings from the answer you derived in Part B.
New EBIT (Both Firms) = 11000 * 2.5 – 11000 * 1 – 12000 = $4500
New Earnings after interest (Firm A) = $4500 – 0 = $4500
New Earnings after interest (Firm B) = $4500 – 500 = $4000

Increase in Firm A Earnings = (4500 – 3000)/3000 = 50%
Increase in Firm B Earnings = (4000 – 2500)/2500 = 60%

D. Why are the percentage changes different?
The percentage changes are different because of the different capital structure between the two…...

Similar Documents

Strategies for Applying Creativity to Problems and Issues

...Strategies for Applying Creativity to Problems and Issues Stacy Fraunhoffer Critical and Creative Thinking Randall Vicks There are several strategies we can use for applying creativity to problems and issues concerning the topic. Our topic is from last week regarding a Chinese man who thinks he has the right to sue his wife because she failed to inform him of plastic surgery that she had done prior to them meeting. He says that he has been misled because he thought his children would have her beautiful genes. He is suing her because she had ugly children. I would begin by taking the novel approach to encourage the readers to research each side of the story so they had all the facts. Then I would also improve on what the writer originally had said. I would also devise or modify any new information that I may come across. Strategies for promoting curiosity in this story can be done several ways. I believe the best way would be the novel approach. Doing things by taking the novel approach seems to be very effective and that is because it is done in a new and different way. The other strategies which are devising or modifying a process or system, inventing a new product or service, finding new uses for existing things, improving things, and inventing or redefining a concept also work well. You need to have enough information to effectively deal with the problem and to see it from all aspects. These various methods can be used for producing ideas to eliminate the......

Words: 330 - Pages: 2

Ebay Problem and Market Strategy

...1. What is eBay’s problem? 2. Which marketing strategy was eBay following: market development or product development? Do you agree with it? 3. What decision-making process should CEO Donahoe utilize to make the decisions necessary to change the company’s product, customer approach, and business model? Pierre Omidyar founded a sole proprietorship in September 1995 called Auction Web to allow people to buy and sell goods over the Internet. The new venture was based on the idea of developing a community-driven process, where an organic, evolving, self-organizing web of individual relationships, formed around shared interests, would handle tasks that other companies handle with customer service operations. By May 1996, Omidyar had added Jeff Skoll as a partner and the venture was incorporated as eBay. Two years later, Omidyar asked Meg Whitman to direct corporate strategy to continue the accelerated growth rate of the company. Whitman brought to the company global management and marketing experience and soon became President and CEO. In almost no time, the company became one of the Web’s most successful sites, with 233 million registered users. By 2007, the average eBay user spent nearly two hours a month on the site—more than five times the time spent on SOLUTION 1. The previous CEO, Meg Whitman, had spent $6 billion to significantly expand the company through a series of acquisitions, such as Skype, PayPal, StubHub,,, Stumbleupon,......

Words: 801 - Pages: 4

Integrative Problems and Virtual Organization Strategy

...Integrative Problems and Virtual Organization Strategy FIN/370 Integrative Problems and Virtual Organization Strategy In this paper, Team C will discuss Huffman Trucking Company and recommend a strategy that is best for this company and what will benefit the company the most. It will discuss the strategies such as undertaking IPOs, merging with other companies and ways to get other companies, as a way to help their company to branch out. Some of the other things that will be discussed are the benefits and risks, the advantages and disadvantages of all the approaches that should be taken into consideration for what is the best way to strategy for the business, the strengths and weaknesses of each approach, and the opportunities that each one has to give. Finally, the last thing discussed is the globalization on financial decisions, factors of the exchange rate risks, and the mitigation of exchange rate risk. The one thing that Huffman Trucking Company has is strength and they can use this if they decide to go public through the IPO. By doing this Huffman Trucking will be able to raise extra capital for the company. This will then increase the liquidity of the stocks and it will increase the revenue to invest or it could extend the business. This will give the Huffman Trucking Company an opportunity to market the company to the public to extend the company’s service. This strength is to be able to limit their competition. Therefore, this will increase the......

Words: 1080 - Pages: 5

Fin/370 Week 5 Individual Financing Strategy Problems

...Problem: Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell 10,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.) What is the operating income (EBIT) for both firms? What is the EBIT? EBIT = (Sales Revenue – Variable Cost – Fixed Cost) Sales Revenue: 10,000 x $2.50 = $25,000 Variable Cost: 10,000 x $1 = $10,000 Fixed Cost = $12,000 EBIT = $25,000 - $10,000 - $12,000 = $3,000 EBIT = $3,000 What are the earning after interest? Earning after interest= EBIT – Interest on debt Firm A: EBIT ($3,000) – Interest on debt ($0) = $3,000 Firm A Earning after interest: $3,000 Firm B: EBIT ($3,000) – Interest on debt ($5,000 x 10%) = $3000 - $500 = $2,500 Firm B: Earning after interest: $2,500 If sales increase by 10 percent to 11,000 units, by what percentage will each firm’s earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in these earnings from the answers you derived in Part B. EBIT = (Sales Revenue – Variable Cost – Fixed Cost) Sales Revenue: 11,000 x $2.50 = $27,500 Variable Cost: 11,000 x $1 = $11,000 Fixed Cost = $12,000 EBIT = $27,500 - $11,000 - $12,000 = $4,500 EBIT = $4,500 Firm A: EBIT......

Words: 369 - Pages: 2

Strategy as a Wicked Problem

...1. Define Wicked Problem, Examples, 10 Properties. 2. Summarize the 4 solutions listed 3. Summarize PPG’s situation and wickedness 4. Analyze their strategy to come up wickedness through solutions listed in the context: 1. Involve stakeholders, document opinions and communicate 2. Define the corporate identity 3. Focus on action and Adopt a “feed-forward” orientation 5. Lessons from case PPG Question 3 The company, founded over a century ago as a plate-glass manufacture, chemicals and coating business. PPG is a global player with 125 manufacturing facilities and partner over 25 countries,. PPG first became aware of strategy’s wickedness in the late 1980s. Two missteps taught the company that diversification, be it into other industries or countries, is fraught with peril: 1 Diversification: PPG expanded its portfolio by acquiring medical electronics businesses from Honeywell and Litton Industries in 1986 and from Allegheny International in 1987. However, the biomedical industry’s volatility and the units’ focus on customization did not fit the company’s competence in low cost, standardized production. As resulte: Seven years later, PPG had to sell the division. 2 Being in other countries: The company others wicked challenge was China, where PPG offering the market with something they do not have competitive edge over the local supplier. This result where PPG’s operations......

Words: 353 - Pages: 2

Pia Problems & Strategies Tqm

...mission and the definitive objective for long term survival. Organization‘s main concern is how to achieve organizational goals & long term survival, it depends on multiple factors. The very basic level of organizational survival is based on the internal integration and the process of external adaptation. The first section of the report presents the articles on which our study is based, the second section of the study is the introduction of the organization, and the third section shows the passenger survey and questionnaire. Fourth section results explorations and investigates of the challenges and problems which the national carrier PIA (Pakistan International Airline) is facing while implementing TQM. The findings and results advocate that Total Quality Management System should develop itself with the changing internal and external environment. Some strategies have been by us which would improve the performance of the organization and help it to cope up with the challenges. At last, our research conclusion & there also recommendations were made which are helpful for the organization (Pakistan International Airline) for their future perspectives. Article # 1   Published: December 21, 2011 This article is not written with the intent of defending President ASIF ALI ZARDARI or his party. It aims to illustrate how the hyper personalization of politics and governance in Pakistan has created unachievable expectations for quick fixes, based on overly......

Words: 7870 - Pages: 32

Financing Strategies for Rural Development

...MIX OF FUNDING STRATEGIES FOR DISTRICT ASSEMBLIES TO PROMOTE POVERTY REDUCTION AND SUSTAINABLE RURAL COMMUNITY DEVELOPMENT IN GHANA PRESENTED TO: Professor Chung – Sik Yoo PRESENTED BY: Samuel Danaa DATE: September 23, 2014 1.0 Introduction: Ghana was the first country in Sub-Saharan Africa to attain independence and the post-independence economy appeared stable and prosperous raising the development hopes of its citizens. This was a period of real hope and expectations. After over fifty years its actual development is far below the development potential it holds and various propositions have been offered as to the way forward. Nearly more than half of Ghana’s population live in rural areas under what, by modern standards may be characterized as harsh and subnormal conditions. Every Ghanaian government since independence has been committed to improving the quality of life in the rural areas; however, they have been overwhelmed by economic conditions most of which they have been unable to control. Examining the achievements agencies tasked with responsibility, it is quite apparent that their successes in combating the development problem in rural areas are dismal. Having come to grips with the failures of past development model, development experts and practitioners have not relented in striving to find and propose new models that can best improve the lives of the citizenry. While the debate continuous as to what strategy is best......

Words: 917 - Pages: 4

Futures Arbitrage Strategies End-of-Chapter Questions and Problems

...CHAPTER 10: FUTURES ARBITRAGE STRATEGIES END-OF-CHAPTER QUESTIONS AND PROBLEMS 1. (Delivery Options) The U.S. Treasury bond futures contract contains several imbedded options. First, the wild card option results from a difference in the closing times of the spot and futures markets. The Treasury bond futures contract stops trading at 3:00 P.M. Eastern time. The spot market for Treasury bonds operates until 5:00 P.M. Eastern time. The wild card option is the opportunity the holder of the short futures contract has to lock in the invoice price at 3:00 P.M. and make delivery if the spot price falls below the established invoice price between 3:00 P.M. and 5:00 P.M. The option exists only during the delivery month. Second, the holder of the short position has the right to deliver any of a number of acceptable bonds, known as the quality or switching option. Sometimes the holder of the short position will be holding a bond that is not the best to deliver. A profit is sometimes possible by switching to another bond. Third, because the last day for trading a T-bond futures contract is the eighth-to-last business day of the delivery month and delivery can take place during the remaining business days, there is an end-of-the-month option. The invoice price during those final delivery days is based on the settlement price on the last trading day. Thus, during the last seven delivery days, the holder of the short position has full knowledge of the price that would be received for......

Words: 3756 - Pages: 16

Sme Financing in Bangladesh Problems and Prospects

...SME Financing in Bangladesh: Problems and Prospects SME Financing in Bangladesh: Problems and Prospects Prepared for Arafat Rahman Assistant Professor Institute of Business Administration Jahangirnagar University Prepared by Tanjila Sharmin 201301029 Md. Mourshed Uddin 201303006 Naim Ahmad 201403020 Sayeed Ishtiaque Ahmed 201403027 Md. Sazzad Hossain 201403034 Course Participant BUS 501: Managerial Communication (Section-02) WMBA Program Institute of Business Administration Jahangirnagar University December 20, 2014 Letter of authorization November 23, 2014 Course Participant BUS 501: Managerial Communication The purpose of this report is to familiarize you with the basic techniques and principles associated with writing a formal business report so that you can build and enhance this specific written communication skill. This formal report will be coordinated with a formal presentation session on the topic of the report. At a minimum, your report should include information related to the following issues: Introduction to the Industry/Sector/Area – What is the industry/sector/Area? What is the background of the industry/sector/Area in Bangladesh? Who are the major participants? You may show how the industry/sector/area is contributing to the economic development of the country. In this case, you must use industry-related data for the past three years (at least). In case of export-oriented......

Words: 5047 - Pages: 21

Major Problems of the Banking Industry and Strategies to Overcome Them: a Study on Bangladesh.

...Major Problems of the Banking Industry and Strategies to overcome them: A study on Bangladesh. Table of Content Topic Page# 1.0 Introduction ------------------------------------------------------------------------------------3 2.0 Review of Previous Empirical Literature------------------------------------------------4 3.0 Banking Industry in Bangladesh---------------------------------------------------------- 3.1 What is a Bank? ----------------------------------------------------------------------5 3.2 Definitions of Bank form different view -------------------------------------5 3.3 Where does the word BANK come from? ------------------------------------6 3.4 Why Banks? Why don’t go to another financial institution? -------------7 3.5 Banking System in Bangladesh---------------------------------------------------7 3.6 Banking system is very from country to country because of Following 3 reasons---------------------------------------------------------------------12 3.7 There are different kinds of financial services firms calling themselves Banks---------------------------------------------------------------------------------------12 4.0 Major Problems Faced by Bangladeshi Banking Industry-------------------------14 4.1 Lack of Good Governance, Accountability and Transparency------------14 4.2 Low quality of asset ---------...

Words: 5756 - Pages: 24

Integrative Problems and Virtual Organization Strategy

...Integrative Problems and Virtual Organization Strategy FIN/370 Integrative Problems and Virtual Organization Strategy The Huffman Trucking Company was founded by K. Huffman in Cleveland, Ohio in 1936 with one tractor-trailer. By 1945 the company grew to 16 tractors and 36 trailers. Some of the most important clients are the U.S. Government, automotive, electronic, and plastic industries. The company has four locations: Cleveland, OH, Los Angeles, CA, St. Louis, MO, Bayonne, NJ (Apollo Group, Inc. 2011). The company grew through the increase of internal sales, and the acquisition of five different carriers from the East. Up until now, this growth has enabled the Huffman Trucking to continue to be privately held. Huffman Trucking now wants to expand operations and is considering three separate options to do so. This paper will compare Huffman’s options to go public, acquire another organization within the same industry, or merge with another organization. Going Public By going public the Huffman trucking company will improve its liquidity, gain more acquisition opportunities, as well as the ability to gain capital at a lower cost ("Going Public Experts", nd). The process of going public is not all beneficial; some of the down sides are the extensive time needed to complete the process. Furthermore, the payments of millions of dollars in fees such as legal, accounting, printing, listing, filing, along with the government fees pay to meet the tough standards......

Words: 1236 - Pages: 5

Chase's Strategy of Financing Hong Kong Disney

...1. Chase’s International Strategy and Objectives As the largest bank in the United States by assets and market capitalization, JPMorgan Chase is a major provider of financial services with assets of $2 trillion and according to Forbes magazine is the world’s largest public company based on a composite ranking. Being one of Disney’s top 10 relationship banks, Chase was the third largest bank in the United States with more than $400 billion of assets and $175 billion of loans in 1999, and was a leader in the field of syndicated finance. In 1999, Chase was the lead arranger for 34% of total syndicated loans by dollar volume in the world’s largest market, the United States, compared to 21% for the next largest competitor.6 In the U.S. market for loans greater than $1 billion, its dominance was even more pronounced: it led 47.5% of the deals, three times more than its nearest competitor. Years of leading performance in the field of syndicated finance has led JPMorgan Chase a world’s well-known expertise in arranging large volume syndicated loans and thus significantly improved its returns as an underwriter, and its credit exposure as a lender, which reflect its high criteria of service. In addition to the great reputation, Chase has established relationships with many of the world’s famous companies and groups, which will bring it lots of business opportunities. It had over 400 professionals in its Global Syndicated Finance Group with offices in New York,......

Words: 4739 - Pages: 19

Integrative Problems and Virtual Organization Strategy Paper

...Integrative Problems and Virtual Organization Strategy Paper Meline Constantin, Angela Currier, Brett Kinney, Nicole Mcclelland, James Schmidt, and Kevin Sult FIN 370 June 20, 2011 Cheryl Heath Integrative Problems and Virtual Organization Strategy The medical world has started to join corporate America. Large companies run multiple hospitals and medical facilities across the world and it puts smaller community hospitals in a position that is not always beneficial. Patton Fuller Community Hospital is no exception. They have decided to expand to help meet the demand of the public and to help their hospital make profits necessary to keep the facility running. However, there are some decisions that need to be made. The hospital could have an IPO or could merge or be acquired by another hospital. To decide which option is best, Team B will weight the pros and cons of each option by showing the strengths, weaknesses, opportunities, and threats created with each option. Strengths of an IPO, Acquisition and Merger The strengths of an IPO in a hospital would be to raise more capital for PFCH to use for their various corporate purposes such as working capital, acquisitions, and marketing, to name a few. With PFCH taking advantage of an IPO we can take advantage of new larger opportunities that can start building toward incorporation and statewide expansion. IPOs also allow the company to access their capital more rapidly, and......

Words: 1650 - Pages: 7

Financing Strategy

...Running Head: Financing Strategy John Smith Grace University (This a financing strategy document written in APA and relying on two sources. The document proposes a fixed rate, non-recourse construction-permanent loan of $75 million that will be sought from experienced lenders to finance the 100-unit apartment building project.) Financing Strategy Document I. Preamble The proposed company will be a development firm which will focus on developing urban villages geared specifically towards the elderly population. The first development will be near Jones Beach area in New York and will consist of 5 buildings with 5 floors each, 4 units per floor (100 units in total). Within this village there will also be several amenities like stores, shops, supermarket, restaurants, health clinic, movie theater, etc) available to the residents. The price per unit will be $1,000,000 and the monthly maintenance fee will be $1000 per unit. In this end, this financing strategy aims at raising fund in form of a construction loan for about 80% of the projected costs for about $75,000,000. In addition, investors are expected to pump in $40,000,000. II. Principles While the company is committed towards developing urban villages specifically for the elderly population, we believe in minimizing costs through efficient use of financial resources through risk management strategies employed by our well able team of analysts (CIVICUS, (n.d). There is no such thing as “survival at all......

Words: 885 - Pages: 4

Integrative Problems & Virtual Organization Strategy Paper

...Integrative Problems & Virtual Organization Strategy Paper There are mainly three options for expansion when a company is privately held and wants to expand their operation. This paper will discuss three specific options that a privately held company would have if they were to expand. First of those options would be to go public through an IPO or Initial Public Offerings. The second option would be to acquire another organization in the same industry in order to expand the business. The third and final option being to merge with another organization. With all three of these options having strengths and weaknesses, this paper will discuss some of the strengths and weaknesses of each and what opportunities may arise from each approach as well as the threats. Other things that this company may want to consider when looking to expand are the effects of globalization on the company's financial decision as well as the factors that contribute to exchange rate risks. Finally ending the paper with mitigating the exchange rate risk. Going Public through an IPO Taking a business public or better known as participating in an initial public offering is a process where the business is offered to the public by selling stock of the company. In turn, these stocks represent a partial ownership in the company to the individuals that purchase the stock. One common step in deciding whether or not to take a company public it is always best to speak with an IPO consultant to help determine......

Words: 1357 - Pages: 6

Sumo Mouse | Micky De Rauch | AVI ReComp 1.4.5.