18. Assume that you and your brother plan to open a business that will make and

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18. Assume that you and your brother plan to open a business that will make and sell a newly designed type of sandal. Two robotic machines are available to make the sandals, Machine A and Machine B. The price per pair will be $19.50 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. What is the difference between the breakeven points for Machines A and B? (Hint: Find BEB - BEA)

Machine A Machine B
Price per pair (P) $19.50 $19.50
Fixed costs (F) $25,000 $100,000
Variable cost/unit (V) $7.00 $4.00

a. 3,784
b. 4,318
c. 3,739
d. 4,674
e. 4,452


19. Your company, which is financed entirely with common equity, plans to manufacture a new product, a cell phone that can be worn like a wristwatch. Two robotic machines are available to make the phone, Machine A and Machine B. The price per phone will be $250.00 regardless of which machine is used to make it. The fixed and variable costs associated with the two machines are shown below, along with the capital (all equity) that must be invested to purchase each machine. The expected sales level is 27,000 units. Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project, so T = 0. How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE, i.e., what is ROEB - ROEA? (Hint: Since the firm uses no debt and its tax rate is zero, ROE = EBIT/Required investment.)

Machine A Machine B
Price per phone (P) $250.00 $250.00
Fixed costs (F) $1,000,000 $2,000,000
Variable cost/unit (V) $200.00 $150.00
Expected unit sales (Q) 27,000 27,000
Reqd equity investment $2,500,000 $3,000,000

a. 9.43%
b. 8.49%
c. 8.68%
d. 9.33%
e. 8.12%


20. You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?
a. You will have 200 shares of stock, and the stock will trade at or near $120 a share.
b. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
d. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
e. You will have 50 shares of stock, and the stock will trade at or near $600 a share.


21. Portland Plastics Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Capital budget $12,500
% Debt 40%
Net income (NI) $9,250

a. 19.68%
b. 23.65%
c. 18.92%
d. 17.22%
e. 15.70%


22. Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $85 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?
a. $35.28
b. $39.53
c. $42.50
d. $33.58
e. $33.15


23. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $80 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?
a. $30.67
b. $25.33
c. $26.40
d. $22.40
e. $26.67


24. Ring Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $575,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?
a. $924,550
b. $1,296,625
c. $1,138,775
d. $1,104,950
e. $1,127,500

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