FIN501 Ryerson University Module 4 QuickCharge Corporation case study HiI attached my assignment below. Please let me know if more info is needed. Thanks s

FIN501 Ryerson University Module 4 QuickCharge Corporation case study HiI attached my assignment below. Please let me know if more info is needed. Thanks so much. Module 4 – Case
LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND
POLICY
Assignment Overview
Before starting on this assignment, make sure to carefully
review the background readings. Part A requires you to
make some computations, and Part B requires you to
analyze some scenarios using your knowledge of the
concepts. So make sure to go through the computational
examples in the required readings and also thoroughly
review the key concepts before starting on this assignment.
Case Assignment
Part A: Quantitative Problems
1. Suppose QuickCharge Corporation manufactures phone
chargers. They sell their chargers for $20. Their fixed operating
costs are $100,000 and their variable operating costs are $10
per charger. Currently they are selling 30,000 chargers per
year.
A. What is QuickCharge’s EBIT (earnings before
interest and taxes) at current sales of 30,000?
B. What is QuickCharge’s breakeven point?
C. Calculate the EBIT if QuickCharge’s sales
increase 50% to 45,000 chargers. What is the
percent of change in EBIT under this increase
in sales? Also, calculate the EBIT if the
company’s sales decrease 50% to 15,000
chargers. What is the percent of change in EBIT
under this decrease in sales?
D. What is QuickCharge’s degree of operating
leverage? Based on your computation, what
does its operating leverage say about
QuickCharge’s business risk?
2. The StayDry Umbrella Corporation will have an EBIT of
$100,000 if there is a normal amount of rain this year. But if
there is a drought, they will have an EBIT of only $50,000. The
interest rate on debt is 10%, and the tax rate is 35%. The
company does not pay any preferred dividends.
A. If StayDry has zero debt and 50,000 outstanding
shares, what will its EPS (earnings per share)
be if there is normal rain? What will its EPS be if
there is a drought? What is its DFL (degree of
financial leverage)?
B. Now suppose StayDry has decided to take on
$300,000 in debt and has used these funds to
buy back half of the outstanding shares so now
there are only 25,000 outstanding shares. What
is the new EPS and DFL for both normal rain
and drought?
C. Based on your answers to a) and b) above, what
are the trade-offs management has to make
between zero debt or $300,000 in debt? What
are the benefits and disadvantages of taking on
this debt?
Part B: Conceptual Questions
1. For each of the following scenarios, explain whether the
situation describes financial risk or business risk. Explain your
answers to each scenario using at least one of the references
from the background readings:
A. A pharmaceutical company has developed a
new cancer treatment drug that has a much
higher success rate than other drugs currently
in the market. It has the potential to triple the
company’s profits. However, the FDA has
expressed concern about some side effects,
and it is not clear if the FDA will approve the
drug.
B. An airline has an EBIT of $100 million per year.
However, it also has a huge amount of debt and
pays $97 million per year in interest. Its EBIT is
relatively stable but tends to go up or down by
$5 million or so each year depending on the
economy.
C. A basketball franchise earns an EBIT of $50
million a year when its team has a winning year.
However, it earns only $10 million when its
team has a losing year.
2. Explain what capital structure theory (or theories) best
describes the following situations. Make sure to cite at least
one of the required textbook chapters for each answer, and to
cite at least two references for this section:
A. A CEO decides to borrow $50,000 in new debt,
and the share prices rise dramatically. He then
decides to sell half of his own personal shares,
and when this is reported in the Wall Street
Journal, the share prices drop dramatically in
value.
B. The corporate tax rate rises from 35% to 45%,
and the XYZ Corporation decides to issue more
debt. A year later, bankruptcy laws are changed
to become much stricter and costlier. XYZ then
decides to pay back half of its debt.
C. A CEO named Joe Bigwig is known for living
large with very expensive cars and a huge
mansion. Joe is seeking a large loan from a
bank to finance some new projects for his
corporation. However, the bank becomes
concerned when they find out that he recently
used company funds to buy a brand-new
company jet and also schedules numerous
business trips to Hawaii and stays in five-star
hotels. The bank tells Joe he will receive the
loan only if he agrees to scale back on his
personal expenses and not give himself or any
other executives a raise until the loan is paid
back.
Assignment Expectations
•
•
Answer the assignment questions directly.
Stay focused on the precise assignment questions. Do not go
off on tangents or devote a lot of space to summarizing general
background materials.
•
•
For computational problems, make sure to show your work and
explain your steps.
For short answer/short essay questions, make sure to
reference your sources of information with both a bibliography
and in-text citations. See the Student Guide to Writing a HighQuality Academic Paper, including pages 11-14 on in-text
citations. Another resource is the “Writing Style Guide,” which
is found under “My Resources” in the TLC Portal.
Module 4 – Background
LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND
POLICY
Required Reading
Capital Structure
Start by viewing the following video. It will introduce you to
capital structure and provide you with a basic understanding
of the main topics from this module:
Obi, P. (2014). Capital structure and financial leverage.
Purdue University. Retrieved
from: https://www.youtube.com/watch?v=xKBdJX-rHMg
Now go through the following tutorials from Investopedia
which include some videos. Start out with the tutorial on
degree of operating leverage, then scroll down to the
sections on earnings before interest and taxes and degree
of financial leverage:
Degree of operating leverage. (n.d.). Investopedia.
Retrieved
from: http://www.investopedia.com/terms/d/degreeofoperatinglever
age.asp
Now dive deeper into the concepts of capital structure with
the following two book chapters. Pay special attention to the
concepts of operating leverage, financial leverage, business
vs. financial risks, and the major theories of capital structure
choices. While the tutorials above will give you a broad
overview of the main topics, the following readings have
worked out problems and solutions that will be essential for
completing the Case Assignment:
Vishwanath, S. (2007). Chapter 19: Optimal capital
structure. Corporate finance: Theory and practice. SAGE
Publications India. Available in the Trident Online Library.
Brigham, E. & Houston, J. (n.d.). Chapter 13: Capital structure and
leverage. Fundamentals of Financial Management. Cengage Learning.
Finally, take a look at the following book chapter on dividend
policy. Take a close look at the concepts of regular dividend
policy and low-regular-and-extra dividend policy, as well as
stock splits and stock repurchases:
Clive, M. (2012). Chapter 15: Dividend policy. Financial
management for non-financial managers. Kogan Page.
Available in the Trident Online Library.
Optional Reading
Ahmad, A. (n.d.) Firm debt part 1: Calculating how much to
borrow. Coursera. Retrieved
from: https://www.coursera.org/learn/financedebt/lecture/0P8l0/firm-debt-part-1-calculating-how-much-to-borrow
Sexton, N. (2010). Introduction to dividend policy. LSBF
Global MBA. Retrieved
from: https://www.youtube.com/watch?v=wPVdxCJ2iCI
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Module 4
Required Material
Obi, P. (2014). Capital structure and financial leverage.
Purdue University. Retrieved
from: https://www.youtube.com/watch?v=xKBdJX-rHMg
Degree of operating leverage. (n.d.). Investopedia.
Retrieved
from http://www.investopedia.com/terms/d/degreeofoperatinglevera
ge.asp
Vishwanath, S. (2007). Chapter 19: Optimal capital
structure. Corporate finance: Theory and practice.SAGE
Publications India. Available in the Trident Online Library.
Brigham, E. & Houston, J. (n.d.). Chapter 13: Capital structure
and leverage. Fundamentals of Financial
Management. Cengage Learning.
Clive, M. (2012). Chapter 15: Dividend policy. Financial
management for non-financial managers. Kogan Page.
Available in the Trident Online Library.
Optional Material
Ahmad, A. (n.d.) Firm debt part 1: Calculating how much to
borrow. Coursera. Retrieved
from: https://www.coursera.org/learn/financedebt/lecture/0P8l0/firm-debt-part-1-calculating-how-much-to-borrow
Sexton, N. (2010). Introduction to dividend policy. LSBF
Global MBA. Retrieved
from: https://www.youtube.com/watch?v=wPVdxCJ2iCI

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