Quantitative Problems Suppose QuickCharge Corporation manufactures phone chargers. They sell their chargers for $20. Thei
Part A: Quantitative Problems
- 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.
- What is QuickCharge’s EBIT (earnings before interest and taxes) at current sales of 30,000?
- What is QuickCharge’s breakeven point?
- 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?
- What is QuickCharge’s degree of operating leverage? Based on your computation, what does its operating leverage say about QuickCharge’s business risk?
- 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.
- 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)?
- 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?
- 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
- For each of the following scenarios, explain whether the situation describes financial riskor business risk. Explain your answers to each scenario using at least one of the references from the background readings:
- 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.
- 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.
- 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.
- 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 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.
- 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.
- 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.· 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 High-Quality Academic Paper,(See Attached) including pages 11-14 on in-text citations. · APA FORMAT · NO Plagiarism ( will check on Turnitin) Reference credible sources only The following resources are notacceptable for this course, keep in mind, there are many others:
- Wikipedia.com
- Ehow.com
- About.com
- Smallbusiness.chron.com
- Diffen.com
- Yourbusiness.azcentral.com
Module Overview
In a corporation's capital structure, there are advantages and disadvantages to having debt. Corporations receive a tax deduction from the interest paid on debt. On the other hand, dividends are not tax deductible. This helps to reduce the cost of debt since the after-tax cost of debt is used in the weighted average cost of capital and not the pre-tax cost of debt. The cost of equity is usually much higher and can be estimated through the Capital Asset Pricing Model (CAPM). If a firm is very successful, the stockholders don’t have to share the profits with debtholders since the return on debt is not a variable.
There are some problems with debt, though. As a company uses more debt in its capital structure, it increases the company’s risk. This increases the costs of equity and debt. If a company has financial problems and can’t cover its interest charges, the firm may have to go bankrupt if it can’t obtain additional financing.
Firms that have quite variable earnings and operating cash flows are better off having limited debt in their capital structures. Companies with more stable earnings and operating cash flows can utilize more debt in their capital structures.
Business risk is probably the most important factor that drives capital structure decisions. Business risk is the riskiness of a company’s operations if it doesn’t utilize debt. Financial risk is the increased shareholder risk from the use of debt in the capital structure. There’s no set optimal capital structure for all firms.
An investor’s total return consists of the capital gains yield and the dividend yield. Not all companies pay dividends; however, for those that do, it is an important component of an investor’s return, particularly for those seeking income. Individuals who are retired are usually the clientele most interested in dividends. If a stock’s price didn’t change all year, yet the company paid a healthy dividend yield, the investor would still earn a positive total return.
Successful companies typically accumulate a large amount of cash on their balance sheet. If the company has funded all the positive NPV projects that it wants to, it can look to paying a dividend or buying back stock. If it currently already pays a dividend, it can look to increase the dividend.
A company that institutes or increases a dividend provides a signal to the marketplace that it anticipates higher future cash flows, because once a company starts or increases a dividend, it rarely reduces or eliminates the dividend. On the other hand, a company that decreases its dividend or eliminates a dividend provides a signal to the marketplace that it anticipates lower future cash flows.
Note: photo courtesy of Nick Youngson (http://nyphotographic.com/). License: Creative Commons 3 - CC BY-SA 3.0
Module 4 – Reading Background Material
LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY
Required Reading
Capital Structure
Start with this interactive tutorial from Pearson that will give you a short overview of the main topics from this module:
Capital Structure and Dividend Policy Interactive Tutorial . (2014). Pearson Learning Solutions, New York, NY.
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/degreeofoperatingleverage.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:
Gitman, L. (2005). Chapter 11: Leverage and capital structure. Principles of Managerial Finance. Pearson Education. Retrieved from: wps.aw.com/wps/media/objects/222/227412/ebook/ch11/chapter11.pdf If the link is down, click Leverage and Capital Structure or Managerial Finance for an alternative link]
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:
Gitman, L. (2005). Chapter 12: Dividend policy. Principles of Managerial Finance. Pearson Education. Retrieved from: wps.aw.com/wps/media/objects/222/227412/ebook/ch12/chapter12.pdf [If the link is down click Dividend Policy or Managerial Finance for an alternative link]
Optional Reading
Obi, P. (2014). Capital structure and financial leverage. Purdue University. Retrieved from: https://www.youtube.com/watch?v=xKBdJX-rHMg
Ahmad, A. (n.d.) Firm debt part 1: Calculating how much to borrow. Coursera. Retrieved from: https://www.coursera.org/learn/finance-debt/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
Boundless. (n.d.). Chapter 13: Capital Structure. Boundless Finance. Retrieved from: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/
Boundless. (n.d.). Chapter 15: Dividends. Boundless Finance. Retrieved from: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/dividends-15/
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Rubric Name: MBA/MSHRM/MSL Case Grading Rubric for Quantitative Business Courses -Timeliness v1
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Module 4 – Case Assignment
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.
· APA FORMAT
· NO Plagiarism ( will check on Turnitin)
Reference credible sources only
The following resources are not acceptable for this course, keep in mind, there are many others:
· Wikipedia.com
· Ehow.com
· About.com
· Diffen.com
· Investopedia.com
· Boundless.com and Lumen
· Course hero
· Studypool
· Chegg
,
Student Guide to Writing
a High-Quality Academic Paper
Follow these guidelines when writing academic papers,
including your Case and SLP assignments.
2
An effective academic writing style is an essential part of a
university education.
Poorly written papers detract from your ability to effectively share
your knowledge and ideas with others, including your professors.
This guide will help you prepare high-quality papers that are:
▪ Logically argued
▪ Clearly structured and formatted
▪ Written in a professional, academic style
The basic structure of an academic paper includes:
3
1. Cover page 2. Introduction 3. Body of the
paper (which may have subsections) 4.
Conclusion 5. Reference page
The cover page of an academic paper should
include the:
▪ University name ▪ Student’s name ▪
Assignment title ▪ Course number and name
▪ Professor’s name ▪ Date Note: Some professors recommend adding the assignment instructions
(tasks and/or questions) to the bottom of the cover page to help students
make sure they have addressed each part of the assignment.
4
University Name
Student’s Name
Module 1 Case Assignment
Course Number: Course Name
Professor’s Name
Date
In the introduction, provide a brief, clear overview of:
1. Each problem or issue that you will discuss
2. The solution to the problem(s) or your response to the
issue(s)
5
3. How you will prove or demonstrate that your solution or
response is correct
Tip: Try writing the body of your paper first. Then come back
and write the introduction once you know what your paper is
about.
6
The body of the paper is where you discuss the solution to the problem(s)
or your response to the issue(s) raised in the assignment.
After you have read the materials related to the assignment, begin by
creating a quick outline:
▪ What are the main points of your argument? Jot them down.
▪ Depending on the length of the paper, 3–6 main points should be
plenty.
▪ If a point is complex, it may have 2 or 3 sub-points. Jot those down as
well.
▪ Now arrange those points in a logical sequence.
▪ Which point needs to be made first because it provides a basis
for the points that follow?
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▪ For example, “Point A leads to point B, which leads to point C, and
when A, B, and C are considered together they mean that the
solution is point D.”
Example of the structure of a Case Assignment that requires 4 pages of
text (not including the cover page, and not including a reference page for assignments that require one):
Main Sections Points Sub-points Page # # of Paragraphs
Cover Page
Introduction 1 1
Body of Paper Point A 1 1
" Point B 2 1
" Sub-point 1 2 1
" Sub-point 2 3 1
8
" Point C 3 1
" Point D 4 2
Conclusion 4 1
Reference Page
In the body of your paper:
Use headings and subheadings to help your reader follow the points and sub-
points in your discussion and to better organize sections and subsections.
Give each point and sub-point a short name that tells your reader what that section
is about. Use those names for your headings.
Here is a quick “how-to” guide to headings with links to examples and instructions:
http://blog.apastyle.org/apastyle/2011/04/how-to-use-fivelevels-of-heading-in-an-
apa-style-paper.html
Now you are ready to begin writing the body of your paper.
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▪ Discuss one point at a time and explain each point clearly.
▪ Discuss one point or sub-point in each paragraph.
▪ As you advance to writing more complex papers (e.g., upper-division
undergraduate or master’s-level assignments), it may take 2 or 3 paragraphs to
fully develop and support a point.
10
In the body of your paper:
Each paragraph should be made up of approximately 3–5 sentences. (Note: A
single sentence is not a paragraph. Break long sentences into 2 or 3 shorter
ones.) Each paragraph should include:
▪ The point or focus of that paragraph in the first sentence
▪ Additional sentences in which you explain, elaborate, and support your point
(see section on Supporting Your Points that begins on the next slide)
▪ A conclusion/transition to the next point and paragraph
Each point should be supported by citing and referencing the sources that provide
the foundation for your solutions and/or responses. How to do this will be
discussed on the next slide.
Supporting Your Points
What makes an academic paper “academic”? How does an academic
11
paper differ from other types of writing—for example, a short story, a blog, a
newspaper article, a business letter, or an e-mail message?
In an academic paper:
▪ You must provide support for each idea, statement, or point that you make that
is based on someone else’s ideas.
▪ Support is provided through citations and references. (References are
discussed beginning on Slide 17.) Citations appear within the paper itself
wherever you draw upon another person’s ideas or another source of
information. References are listed on a separate page at the end of your
paper.
▪ Each citation refers to a specific reference so that your reader can look up the
sources of your support and read them for himself or herself.
▪ Citations are short and usually only include the author’s last name and the
date of publication of the author’s work, for example, “In a study of K–12
education, Jones (2013) found that…”
12
Citation Examples
You can cite at the beginning or ending of a sentence:
▪ According to Jones (2007), a reason for poor student performance is large
classroom size.
▪ Student performance decreases as classroom size increases (Jones, 2007).
When multiple sources support your point, cite them together in alphabetical order
at the end of the sentence:
▪ Educators agree that large classroom size decreases student performance
(Adams, 2005; Jones, 2007; Smith, 2008).
When a source is written by more than one person, give their last names in the
citation at the end of the sentence, like this: (Smith, Adams, & Jones, 2006).
When there is no author and/or no date (e.g., a Web page), see this example:
http://www.apastyle.org/learn/faqs/web-page-no-author.aspx
13
Do not spell out the titles and publication details of your sources in the body of your
paper. Instead, provide a short citation, and add a full reference with the publication
details in your reference list. Interested readers can then find the details about the article
in your reference list at the end of your paper.
Wrong:
The first article that will be discussed is called “The Very Separate Worlds of Academic
and Practitioner Periodicals in Human Resource Management” written by Sara Rynes,
Tamara
Giluk, and Kenneth Brown, which was published in the Academy of Management Journal
(2007) Vol 50, No.5, 987-1008. They studied the gap between academic and practitioner
knowledge.
▪ Note: Do not spell out the title and publication details of your sources in the text. Right
(two different ways):
1. Rynes, Giluk, and Brown (2007) found a gap between academic and practitioner
knowledge.
▪ Note: The authors are the subject of the sentence. This is referred to as an “in-text citation” and
includes just the authors’ last names and year of publication.
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2. A gap was found between academic and practitioner knowledge (Rynes, Giluk, & Brown,
2007). ▪ Note: The citation is placed at the end of a sentence in parentheses. This is called a
“parenthetical citation.” In this type of citation, use an ampersand (&) instead of “and.”
When should you cite a source?
When you use your own words in referring to the ideas or concepts of others
When you use the exact words that are written in one of the sources that you read
▪ Using someone else’s exact words is called a “quotation.”
▪ For quotes of less than 40 words, use quotation marks and follow the quote with a
parenthetical citation that includes:
▪ The name(s) of the author(s)
▪ The year of publication

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