A recently retired professor, Melinda Marketing, plans to establish the Hot-Air Fan Company and manufacture circulating fans. She estimates the fixed cost of operations to be $357,500 annually. The variable cost of producing the fans is forecasted to be $85 per unit. a. How many fans must be sold to break even if the fans are priced at $150? b. If Hot-Air sells 6,000 fans, what will be the EBIT? c. If Hot-Air sells 6,000 fans and has interest expense of $8,125, what is Hot-Air’s times-interest-earned? Hot-Air does not have any nonoperating expenses. d. If the fans are priced at $150, what is Hot-Air’s breakeven sales?
1. A recently retired professor, Melinda Marketing, plans to establish the Hot-Air Fan
Company and manufacture circulating fans. She estimates the fixed cost of operations to
be $357,500 annually. The variable cost of producing the fans is
unit.
a. How many fans must be sold to break even if the fans are priced at $150?
b. If Hot-Air sells 6,000 fans, what will be the EBIT?
c. If Hot-Air sells 6,000 fans and has interest expense of $8,125, what is Hot-Air’s
times-interest-earned? Hot-Air does not have any nonoperating expenses.
d. If the fans are priced at $150, what is Hot-Air’s breakeven sales?
2. Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5.
a. What is Vapor Lock’s DFL?
b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income?
c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income?
3. A CFA is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the required real rate and anticipated inflation, i.e., the exact (multiplicative) approach to the Fisher equation (formula 2.3) should be used. If the real risk-free rate is 4 percent and inflation is expected to be 16 percent next year, what is the appropriate nominal yield on a one-year security with no maturity, default, or liquidity risk?
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