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 ...

1. 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

2. 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,

3. 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 High-Quality
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.
Question
If you have poor credit due to being delinquent on credit card
debt or other issues, chances are the bank is going to charge you
a higher interest rate on a personal loan, or it might not give
you a loan at all. Corporations face the same problems. If a
company takes on too much debt or is otherwise considered to
be a credit risk, then it also gets low credit ratings. In this case,

4. if it wants to take on more debt it needs to issue what is known
as “junk bonds,” or as corporations prefer to call them, “high-
yield bonds.”
Whatever you call these types of bonds, their key feature is that
they pay higher interest than bonds from a corporation that has
a high credit rating. If you have a 401(k) or other retirement
investment fund, chances are you have the option to make a
portion of your investment in these higher risk/higher return
bonds.
Do some research on junk bonds. What kind of controversies do
you see with them? Do you think they are a solid investment for
your retirement, perhaps no riskier than most investments? Or
do they deserve the derogatory term “junk”? Share the links to
the articles you find with your classmates, and discuss your
opinions as to whether you think the higher interest rate
justifies the increased risk.
Your Answer
They are highly yielding profile bonds. They are known like
that since they are naturally non-investment and they are of
high risk. They have a high profile high risk and its yields are
very high. They are fixed income which are rated lower by the
SP at the BB or below as Ba. This is according to rates that
were given by Moody in the profile of investment. (Plath, 1991)
The junk bonds cannot be trusted to be solid investments. This
is because they have controversies and they are of high risk.
They can earn oneself higher yields. On the other hand it has a
possibility of risk of defaulting and hence they deserve to be
disparaging as they are often associated. This is because the
needs of retirement have to be having best returns as the final
status of investments of a person and cannot be subjected to
adverse the credit situations or have a possibility of default.
Anybody who is wise in making investment decisions ought to
acquire the bonds which have ratings that lie between the

5. investment grades. (Plath, 1991)
References
Plath, D., (1991).Financing Takeovers: Junk Bonds and
Leverage Buyouts. Managerial Finance, 17(1),19-24.
Student 1
Junk Bonds - Week 1 - RRA
Contains unread posts
Robert Allen posted Jan 17, 2018 7:18 AM
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Solid investment choices are what makes or breaks you in
retirement right? You hope that you make the right risk choices
and that it pays off within enough time to retire and not require
you to eat tuna everyday or live in a cardboard box for your
retirement home. Each person has to take into account how
much "risk" they want to take on when they are investing their
funds for retirement. If you have a longer amount of time to
retirement, then you could afford to be a little bit more riskier
in your choices earlier in your investments and switch to a more
conservative stance later on...but if you are close to retirement,
you want to maintain a more stable investment choice and make
sure your risks are generally lower. In this case, junk bonds
pay a higher interest rate - but they are also riskier. There is a
chance that they will default and you would be out your funds -
which is probably why the bank wouldn't provide them with a
loan to begin with. Not all companies that have the "less than

6. desired" credit rating will default - but it becomes a matter of
choice on whether you want to take a chance and invest in them
with the high-yield bonds or choose something else a little more
stable. With higher risk comes higher reward - but you have to
look at the big picture and make the best decision overall. It's
almost like going to a casino or betting...you only need to bet or
wager money that you would be ok with losing completely. If
you make money back on it above your initial amount...that's
just gravy - but you have to be prepared to not get that money
back, and have a safety net to fall on it that does happen.
I personally would not like to invest in the junk bond option - I
would prefer more stable stocks/bonds...and I'm ok with not
making go-jillions of dollars on that single investment. To me
it is the overall picture that I need to succeed in and the overall
portfolio needs to be performing at a level to satisfy the
retirement goals.
https://money.usnews.com/investing/bonds/articles/2017-09-
28/why-investors-seek-junk-bonds
Student 2
Mod 4 1st Post Junk Bonds
Contains unread posts
Randy Boucher posted Jan 16, 2018 3:29 PM
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Rarely will an investor find a perfect investment. A bank
account ensures money is not lost, however, most bank accounts
do not keep up with inflation, so money is lost annually. Some
would consider a savings account a bad investment. When
putting investing this way junk bonds may not look as bad.
Whenever an investor is considering junk bonds or any other

7. investment for that matter research must be thorough. There are
safer investments in the arena of junk bonds just as there are
there are junk bonds that are a little riskier than others.
When a person is investing for retirement junk bonds are not
necessarily a bad idea. Although, junk bonds should not be the
only investment in portfolio. Some junk bonds are probably
just that junk, while others are companies trying to fight their
way out of a hole. If the economy is gaining strength junk bonds
are a little safer (Morningstar, n.d.). Just as, junk bonds in a
striving field have a good chance of being paid since the
company has a higher likelihood of being successful
(Morningstar, n.d.). There are other things to look for when
investing in junk. For instance, understanding the firm's debt to
equity ratio and debt to asset ratio will help decide if the junk
bond is a safe bet (Morningstar, n.d.). If the debt to equity or
asset ratio is in good standing often the investor can recoup
some money even if the full maturity is not paid, in the event
the company goes into bankruptcy. Another area is becoming
familiar with the organizations financial strategy (Morningstar,
n.d.). If the organization has well managed it came prevail over
a poor credit rating. Even after conducting all this research
there is still more risk than investment-grade bonds, which is
why junk bonds are high-yield. If the investor is willing to take
the risk, then there should be a reward.
Reference
Morningstar. (n.d.). Junk Bond Creditworthiness. Retrieved
from
http://news.morningstar.com/classroom2/course.asp?docId=5401
&page=3&CN=sample
Student 3
Junk bonds are risky investments because they offer much
higher yields than bonds with high credit ratings. Investors
request higher yields as compensation for the involved risk
(Bodie, 2013). There is a wide range of controversies

8. surrounding the junk investment bonds. On the one hand, they
avoid equity dilution that can emerge from the provision of new
common shares, as well as, provide less costly sources of funds
on an after-tax basis than equity. Compared to commercial bank
loans, high yield bonds require less stringent covenants on the
provider (Bodie, 2013). On the other hand, there is a higher
level of fixed charges that may arise from the issuance of high
yield debt. This enhances credit risk.
Bodie, Z. (2013). Investments. New York, NY: McGraw-Hill.
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