Questions_Chapter_14_Financial_Management_Principles

Gabriela Gonzalez Individual Assignment: from Financial Management: Principles and Applications Chapter 14 14-1-What are financial markets' What function do they perform' How would an economy be worse off without them' Financial market is gives opportunity to people to either trade or buy securities, like stock, bonds, and Purchases of home or insurance policy (Wikipedia, 2010). Is a market that assembles other people’s money to entrust in other company. The function of financial market is that it supplies to the economy demand. The market helps to conduct and animate from the public or firms. Without the market we would be worse off because the government would be inflexible with their laws and ethics. For example in unfair lending practices. 14-3 Distinguish between the money and capital markets. The capital market is a market for securities where companies or government invest in long term funds. Long term meaning is longer than a one year period. Government issues bonds to a person that invest and this way the government or the company can borrow the money with a higher interest return. Money markets are a short term liquid funding, period not longer than thirteen month. Usually in this market the banks borrow or lends among each other or finance company (Keown, Martin, Petty, & Scott, 2005) 14-4 What major benefits do corporations and investors enjoy because of the existence of organized security exchanges' The three benefits that corporations and investor enjoy from security exchange is one that it provides a continuous market which it gives a security in prices; when trading the price is smaller. Second establishes fair security prices which it makes the flowing of demand and supply easier to bid. Third helps “business to raise new capital since the secondary market exist the prices are determined, making it much easier for firms to float new security offerings successfully” (Keown, Martin, Petty, & Scott, 2005) Chapter 15 15-12A. (Break-even point) you are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost Structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm. Return on operating assets = 25% Operating asset turnover = 5 times Operating assets = $20 million Degree of operating leverage = 4 times (Margin) x (Turnover) = Return on operating assets (M) x (5) = 0.25 M = .05 [pic] = $100,000,000 3) Compute EBIT: (.05) ($100,000,000) = $5,000,000 4) Compute revenue before fixed costs. Since the degree of operating leverage is 4 times, revenue before fixed costs (RBF) is 4 times EBIT as follows: RBF = (4) ($5,000,000) = $20,000,000 5) Compute total variable costs: (Sales) - (Total variable costs) = $20,000,000 $100,000,000 - (Total variable costs) = $20,000,000 Total variable costs = $80,000,000 6) Compute total fixed costs: RBF - Fixed costs = $5,000,000 $20,000,000 - fixed costs = $5,000,000 Fixed costs = $15,000,000 7) Find the selling price per unit, and the variable cost per unit: [pic] = $10 [pic] = $8 8) Compute the breakeven point: [pic] = 7,500,000 Units[pic] 15-13A. (Break-even point and operating leverage) Allison Radios manufactures a complete line of radio and communication equipment for law enforcement agencies. The average selling price of its finished product is $180 per unit. The variable cost for these same units is $126. Allison Radios incurs fixed costs of $540,000 per year. a. What is the break-even point in units for the company' b. What is the dollar sales volume the firm must achieve in order to reach the break-even point' c. What would be the firm’s profit or loss at the following units of production sold: 12,000 units' 15,000 units' 20,000 units' d. Find the degree of operating leverage for the production and sales levels given in part (c). [pic] = 10,000 units (b) S* = [pic] = [pic] = [pic] = [pic] DSV = $1,800,000 (c) 12,000 15,000 20,000 Units Units Units Sales (1,800,000*units) $2,160,000 $2,700,000 $3,600,000 Variable costs (126*units) 1,512,000 1,890,000 2,520,000 Revenue before fixed costs (sales-VC) $ 648,000 $ 810,000 $1,080,000 Fixed costs 540,000 540,000 540,000 EBIT (R –fixed costs)= $ 108,000 $ 270,000 $ 540,000 (d) 12,000 units 15,000 units 20,000 units [pic]= 6 times [pic]= 3 times [pic]= 2 times Reference Wikipedia Org., 2010, Financial Market, Retrieved September 12, 2010 From: en.wikipedia.org/wiki/Financial_market - Cached - Similar Keown, A. J., Martin, J.D., Petty, J. W., & Scott, D. F, (2005). Financial management: Principles and applications (10th ed.). Upper Saddle River, NJ: Pearson/ Prentice Hall.