Assignment Instructions/ Description
Week 4 - Assignment 1: Risk and the Use of LeverageGeneral Questions:
Respond to the following questions thoroughly, in 150–300 words for each question. Use your textbook as your first and major reference.1. What are the implications of a change in the return on equity with an increase in debt financing?2. What is the relationship between business risk, financial risk, and beta (systematic or market risk).3. Explain how the degree of operating and financial leverage can change the profitability of the firm when sales levels change significantly. Use examples and explain your answers.Deliverables:1. Answer the General Questions and post your responses to the Discussion Area by Saturday, September 23, 2017. Be sure to explain your answers thoroughly, use specific examples, and cite your sources.2. Participate in the discussions, responding to at least two other responses.Week 4 - Assignment 2: External Funding Requirement and Degree of LeveragePart One: External Funding RequirementYour company, Martin Industries, Inc., has experienced a higher than expected demand for its new product line. The company plans to expand its operation by 25% by spending $5,000,000 for an additional building. The firm would like to maintain its 40% debt to total asset ratio in its capital structure and its dividend payout ratio of 50% of net income. Last year, net income was $2,500,000. Required:1. What are retained earnings for last year?2. How much debt will be needed for the new project?3. How much external equity must Martin use at the beginning of this year in order to finance the new expansion?4. If Martin decides to retain all earnings for the coming year, how much external equity will be required?Part Two: The Degree of LeverageAssume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results: Brake, Inc. Carbo, Inc.Sales $300,000 $300,000Variable Costs 60,000 180,000Fixed Costs 210,000 90,000Operating Income $30,000 $30,000 Required:1. Calculate the contribution margins for the two companies.2. Calculate the break-even point for each firm, in dollars and in units.3. Compare the two companies. What conclusions could you make regarding the use of operating leverage employed by the two firms?4. Assume that both companies experience an increase in sales by 15% next year. What would be the operating income for each firm net year? Explain the difference in the change in operating income between the two companies.5. Based on the information from the above questions, what recommendations would you make to the two companies and why?Deliverables:• Submit your findings from Parts One and Two above in a Microsoft Excel document by Tuesday, September 26, 2017. Show all your calculations.
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