George wants to know how many boxes of chocolate bars he needs to sell for $25.0

Question

George wants to know how many boxes of chocolate bars he needs to sell for $25.00 to break even. He estimates fixed operating costs of $12500 per year, and variable operating costs of $15 per box.

(a)          How many boxes must he sell to break even on operating costs?

(b)          George incorporates, issues 1000 shares of common stock, and declares dividends of $2 per share for the first year. His estimates his growth rate at 3%, required return 5%. How much is his company worth?

(c)           The Board of Directors of George’s corporation declares a dividend to shareholders of record on Thursday April 30, 2015. When is the last day you can purchase stock in George’s corporation and still receive the dividend?

Explanation / Answer

a) Braek even point = Fixed cost / Contribution per unit

$ 12500 / (25-15) = 1250 boxes

b) Value of stock = Dividend per share / (required return - growth rate)

= $ 2/ (5%-3%) = $1

Company's worth = 1000 shares * $ 1 = $ 1000

c) One must buy the stock three days before the record date in order to qualify for the dividend ie. 27th April, 2015.

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