2019-01-25T10:53:26+00:00 Assignments

How would you define “payment stretching”?

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Finance: break-even analysis

Question Finance: break-even analysis

How would you define “payment stretching”? Give scholar references and examples.

Question:

prepare a strategic assessment of the sample break-even analysis you researched. within your assessment, discuss when it is apporopriate to use a break-even analysis and how a break-even analysis is done

Sample Responce

A business has fixed costs of $100,000 per year, while the variable costs are 60% of total sales value. This would mean the contribution margin is 40%, since 100% – 60%=40%

In order to calculate break-even point in sale:

Break-Even Point in Sales = Fixed Costs/contribution margin ratio

= $100,000/40%

= $ 250,000

Once the business has reached this point, in sales or units sold, all costs (Fixed and Variable) have been recovered. Beyond this point, every additional unit sold will result in increasing profit for the business. The increase in profit will be by the amount of unit contribution margin, which is the amount of additional revenues that goes towards covering the fixed costs and profit

Question:

Can someone please how me how to calculate the question below.
Reddy et al (2013) suggest that the Australian commercial property sector has an average historical return of 9.5% with a historical standard deviation of 8.24% and historical correlation with the market of 0.58. The market price of risk is 6% and the average risk-free rate has been 4%. What is the best estimate of the CAPM Beta of commercial property in Australia? [2 Marks]

A. β = 0.33. B. β = 0.92. C. β = 1.0. D. β = 0.58.

The answer is 0.92

Soln

As per CAPM

Return of Property = Risk free rate + Beta(Market Risk Premium)

9.5% = 4% + Beta x 6%

Beta = 5.5%/6% = 0.92

Question:

  COST OF CAPITAL FOR HUBBARD COMPUTER LTD

You have recently been hired by Hubbard Computer Ltd (HCL), in its relatively new treasury management department. HCL was founded eight years ago by Bob Hubbard and currently operates 14 stores in the South Island of New Zealand. HCL is privately owned by Bob and his family, and had sales of $9.7 million last year.

HCL primarily sells to in-store customers who come to the store and talk with a sales representative. The sales representative assists the customer in determining the type of computer and peripherals that are necessary for the individual customer’s computing needs. After the order is taken, the customer pays for the order immediately, and the computer is made to fill the order. Delivery of the computer averages 15 days, and it is guaranteed in 30 days.

HCL’s growth to date has been financed by its profits. When the company had sufficient capital, it would open a new store. Other than scouting locations, relatively little formal

 

analysis has been used in its capital budgeting process. Bob has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Bob would like you to perform the analysis. Since the company is privately owned, it is difficult to determine the cost of equity for the company. Bob wants you to use the pure play approach to estimating the cost of capital for HCL, and he has chosen Harvey Norman as a representative company. The following steps will allow you to calculate this estimate.

QUESTIONS

  1. 1Most publicly traded corporations are required to submit half-yearly and annual reports to the ASX detailing the financial operations of the company over the past half-year or year, respectively. These reports are available on the ASX website atwww.asx.coauor in the investor section of the company’s own website. Go to the ASX website and search for announcements made by Harvey Norman. Find the most recent annual report or half-year report and download the report. Look on the balance sheet to find the book value of debt and the book value of equity. If you look in the report, you should find a section titled ‘Interest Rate Risk Management’, which will provide a breakdown of Harvey Norman’s long-term debt.
  2. 2To estimate the cost of equity for Harvey Norman, go tohttp://au.finance.yacomplus the business section ofwww.smh.com.auand enter the ASX code for Harvey Norman, HVN. Follow the various links to answer the following questions—What is the most recent stock price listed for Harvey Norman? What is the market value of equity, or market capitalisation? How many shares does Harvey Norman have outstanding? What is the most recent annual dividend? Can you use the dividend discount model in this case? What is the beta for Harvey Norman? Now go back tohttp://au.finance.yahoo.comand find the ‘Bonds’ link. What is the yield on government debt? Using the historical market risk premium, what is the cost of equity for Harvey Norman using the CAPM?

 

  1. 3You now need  to  calculate  the  cost  of  debt  for  Harvey  Norman.  Go  towww.westpac.cauand find the current business loan rates equivalent for each of Harvey Norman’s debts. What is the weighted average cost of debt for Harvey Norman using the book-value weights and the market-value weights? Does it make a difference in this case if you use book-value weights or market-value weights?

 

  1. 4You now have all the necessary information to calculate the weighted average cost of capital for Harvey Norman. Calculate the weighted average cost of capital for Harvey Norman using book value weights and market value weigh Assume Harvey Norman has a 30% tax rate. Which cost of capital number is more relevant?

 

  1. 5You used Harvey Norman as a pure play company to estimate the cost of capital for

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