Problem 1 Break-even analysis A company\'s fixed operating costs are $730,000, i

Question

Problem 1

Break-even analysis

A company's fixed operating costs are $730,000, its variable costs are $3.55 per unit, and the product's sales price is $4.10. What is the company's breakeven point; that is, at what unit sales volume will its income equal its costs? Round your answer to the nearest whole.

  units

Problem 13-2
Optimal capital structure

Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:

Assuming that the firm uses only debt and common equity, what is Jackson's optimal capital structure? Round your answers to two decimal places.

% debt
% equity

At what debt ratio is the company's WACC minimized? Round your answer to two decimal places.

%

Debt/Capital Ratio Projected EPS Projected Stock Price             20% $3.25         $32.00                         30 3.45         37.75                         40 3.85         37.00                         50 3.65         33.25            

Explanation / Answer

1.Break-even Point=Fixed Cost/Unit Contribution=730000/(4.10-3.55)=1327273

2.The capital structure is optimal when the Debt to Capital is 30% as at that the projected stock price is the highest. The WACC is minimum when Debt to Capital is 50% as higher the debt , lower is the WACC.

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