11. value: 1.00 points Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide a return of 11 percent and can be financed at 8 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a return of 18 percent but would cost 20 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm’s capital structure. a. Compute the weighted average cost of capital. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)   Weighted average cost of capital  %   b. Which project(s) should be accepted? New machine Piece of equipment 12. value: 1.00 points A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $310,000 a year for the next 30 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at 4 percent. The lawyer for the defendant’s insurance company argues for a discount rate of 9 percent. What is the difference between the present value of the settlement at 4 percent and 9 percent? Compute each one separately. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Present Value   PV at 4% rate $   PV at 9% rate   Difference $ 13. value: 1.00 points The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 13 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 20 percent higher; that is, firms that paid 15 percent for debt last year will be paying 18.00 percent this year. a. If the Goodsmith Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 20 percent increase? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)   Aftertax cost of debt  %   b. If the receipts of the foundation were found to be taxable by the IRS (at a rate of 20 percent because of involvement in political activities), what would the aftertax cost of debt be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)   Aftertax cost of debt  %   14. value: 1.00 points Airborne Airlines Inc. has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $96 and is currently selling for $960. Airborne is in a 40 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. a. Compute the yield to maturity on the old issue and use this as the yield fo.

1. 11.
value:
1.00 points
Speedy Delivery Systems can buy a piece of equipment that is
anticipated to provide a return of 11 percent and can be
financed at 8 percent with debt. Later in the year, the firm turns
down an opportunity to buy a new machine that would yield a
return of 18 percent but would cost 20 percent to finance
through common equity. Assume debt and common equity each
represent 50 percent of the firm’s capital structure.
a.
Compute the weighted average cost of capital. (Do not round
intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Weighted average cost of capital
%
b.
Which project(s) should be accepted?
New machine
Piece of equipment
12.
value:
1.00 points

2. A brilliant young scientist is killed in a plane crash. It is
anticipated that he could have earned $310,000 a year for the
next 30 years. The attorney for the plaintiff’s estate argues that
the lost income should be discounted back to the present at 4
percent. The lawyer for the defendant’s insurance company
argues for a discount rate of 9 percent.
What is the difference between the present value of the
settlement at 4 percent and 9 percent? Compute each one
separately. Use Appendix D for an approximate answer but
calculate your final answer using the formula and financial
calculator methods. (Do not round intermediate calculations.
Round your answers to 2 decimal places.)
Present Value
PV at 4% rate
$
PV at 9% rate
Difference
$

3. 13.
value:
1.00 points
The Goodsmith Charitable Foundation, which is tax-exempt,
issued debt last year at 13 percent to help finance a new
playground facility in Los Angeles. This year the cost of debt is
20 percent higher; that is, firms that paid 15 percent for debt
last year will be paying 18.00 percent this year.
a.
If the Goodsmith Charitable Foundation borrowed money this
year, what would the aftertax cost of debt be, based on their
cost last year and the 20 percent increase? (Do not round
intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Aftertax cost of debt
%
b.
If the receipts of the foundation were found to be taxable by the
IRS (at a rate of 20 percent because of involvement in political
activities), what would the aftertax cost of debt be? (Do not
round intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Aftertax cost of debt
%
14.
value:
1.00 points
Airborne Airlines Inc. has a $1,000 par value bond outstanding

4. with 20 years to maturity. The bond carries an annual interest
payment of $96 and is currently selling for $960. Airborne is in
a 40 percent tax bracket. The firm wishes to know what the
aftertax cost of a new bond issue is likely to be. The yield to
maturity on the new issue will be the same as the yield to
maturity on the old issue because the risk and maturity date will
be similar.
a.
Compute the yield to maturity on the old issue and use this as
the yield for the new issue. (Do not round intermediate
calculations. Input your answer as a percent rounded to 2
decimal places.)
Yield on new issue
%
b.
Make the appropriate tax adjustment to determine the aftertax
cost of debt. (Do not round intermediate calculations. Input
your answer as a percent rounded to 2 decimal places.)
Aftertax cost of debt
%
15.
value:
1.00 points
Terrier Company is in a 35 percent tax bracket and has a bond
outstanding that yields 9 percent to maturity.
a.
What is Terrier’s aftertax cost of debt? (Do not round
intermediate calculations. Input your answer as a percent

5. rounded to 2 decimal places.)
Aftertax cost of debt
%
b.
Assume that the yield on the bond goes down by 1 percentage
point, and due to tax reform, the corporate tax rate falls to 20
percent. What is Terrier’s new aftertax cost of debt? (Do not
round intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Aftertax cost of debt
%
c.
Has the aftertax cost of debt gone up or down from part a to
part b?
It has gone up
It has gone down

6. 16.
value:
2.00 points
KeySpan Corp. is planning to issue debt that will mature in
2035. In many respects, the issue is similar to the currently
outstanding debt of the corporation. Use Table 11-3.
a.
Calculate the yield to maturity on similarly outstanding debt for
the firm, in terms of maturity. (Input your answer as a percent
rounded to 2 decimal places.)
Yield
%
Assume that because the new debt wil be issued at par, the
required yield to maturity will be .15 percent higher than the
value determined in part a.
b.
What is the new yield to maturity? (Do not round intermediate
calculations. Input your answer as a percent rounded to 2
decimal places.)
Yield
%

7. c.
If the firm is in a 30 percent tax bracket, what is the aftertax
cost of debt for the yield determined in partb?(Do not round
intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Aftertax cost of debt
%
17.
value:
1.00 points
Wallace Container Company issued $100 par value preferred
stock 10 years ago. The stock provided a 7 percent yield at the
time of issue. The preferred stock is now selling for $72.
What is the current yield or cost of the preferred stock?
(Disregard flotation costs.) (Do not round intermediate
calculations. Input your answer as a percent rounded to 2
decimal places.)
Current yield
%
18.
value:
2.00 points
The treasurer of Riley Coal Co. is asked to compute the cost of
fixed income securities for her corporation. Even before making
the calculations, she assumes the aftertax cost of debt is at least
2 percent less than that for preferred stock.

8. Debt can be issued at a yield of 8.5 percent, and the
corporate tax rate is 25 percent. Preferred stock will be priced
at $70 and pay a dividend of $5.50. The flotation cost on the
preferred stock is $3.
a.
Compute the aftertax cost of debt. (Do not round intermediate
calculations. Input your answer as a percent rounded to 2
decimal places.)
Aftertax cost of debt
%
b.
Compute the aftertax cost of preferred stock. (Do not round
intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Aftertax cost of preferred stock
%
c.
Based on the facts given above, is the treasurer correct?
Yes, the treasurer is correct.
No, the treasurer is incorrect.

9. 19.
value:
2.00 points
Compute Ke and Kn under the following circumstances:
a.
D1 = $6.00, P0 = $74, g = 5%, F = $5.00. (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Ke
%
Kn
%
b.
D1 = $.30, P0 = $34, g = 9%, F = $2.50. (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Ke
%
Kn
%

10. c.
E1 (earnings at the end of period one) = $9, payout ratio equals
20 percent, P0 = $38, g = 8.0%, F = $3.10. (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Ke
%
Kn
%
d.
D0 (dividend at the beginning of the first period) = $8, growth
rate for dividends and earnings (g) = 3%,P0 = $64, F = $2. (Do
not round intermediate calculations. Round your answers to 2
decimal places.)
Ke
%
Kn
%
20.
value:
1.00 points
Global Technology’s capital structure is as follows:

11. Debt
50
%
Preferred stock
35
Common equity
15
The aftertax cost of debt is 8.00 percent; the cost of preferred
stock is 12.00 percent; and the cost of common equity (in the
form of retained earnings) is 15.00 percent.
Calculate the Global Technology’s weighted cost of each source
of capital and the weighted average cost of capital. (Do not
round intermediate calculations. Input your answers as a percent
rounded to 2 decimal places.)
Weighted Cost
Debt (Kd)
%
Preferred stock (Kp)
Common equity (Ke)

12. Weighted average cost of capital (Ka)
%
21.
value:
2.00 points
Sauer Milk Inc. wants to determine the minimum cost of capital
point for the firm. Assume it is considering the following
financial plans:
Cost
(aftertax)
Weights
Plan A

13. Debt
6.0
%
25
%
Preferred stock
12.0
15
Common equity
16.0
60
Plan B
Debt

14. 6.2
%
35
%
Preferred stock
12.2
15
Common equity
17.0
50
Plan C
Debt
7.0
%
45
%
Preferred stock
11.7

15. 15
Common equity
7.6
40
Plan D
Debt
7.0
%
55
%
Preferred stock
12.6
15
Common equity
9.8

16. 30
a-1.
Compute the weighted average cost for four plans. (Do not
round intermediate calculations. Input your answers as a percent
rounded to 2 decimal places.)
Weighted Cost
Plan A
%
Plan B
%
Plan C
%
Plan D
%
a-2.
Which of the four plans has the lowest weighted average cost of
capital?
Plan A
Plan B
Plan C
Plan D

17. b.
What is the relationship between the various types of financing
costs and the debt-to-equity ratio?
All types of financing costs increase as the debt-to-equity ratio
increases.
All types of financing costs decrease as the debt-to-equity ratio
increases.
22.
value:
2.00 points
A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr.Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average
cost of capital.
The company currently has outstanding a bond with a 9.7
percent coupon rate and another bond with an 7.3 percent rate.
The firm has been informed by its investment banker that bonds
of equal risk and credit rating are now selling to yield 10.6
percent. The common stock has a price of $51 and an expected
dividend (D1) of $1.71 per share. The historical growth pattern
(g) for dividends is as follows:
$1.26

18. 1.40
1.55
1.71
The preferred stock is selling at $71 per share and pays a
dividend of $6.70 per share. The corporate tax rate is 30
percent. The flotation cost is 3.0 percent of the selling price for
preferred stock. The optimum capital structure for the firm is 25
percent debt, 20 percent preferred stock, and 55 percent
common equity in the form of retained earnings.
a.
Compute the historical growth rate. (Do not round intermediate
calculations. Round your answer to the nearest whole percent
and use this value as g. Input your answer as a whole percent.)
Growth rate
%
b.
Compute the cost of capital for the individual components in the
capital structure. (Use the rounded whole percent computed in
part a for g. Do not round any other intermediate calculations.
Input your answers as a percent rounded to 2 decimal places.)
Cost of Capital
Debt (Kd)
%
Preferred stock (Kp)
Common equity (Ke)

19. c.
Calculate the weighted cost of each source of capital and the
weighted average cost of capital. (Do not round intermediate
calculations. Input your answers as a percent rounded to 2
decimal places.)
Weighted Cost
Debt (Kd)
%
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Ka)
%
23.
value:
2.00 points
Northwest Utility Company faces increasing needs for capital.
Fortunately, it has an Aa3 credit rating. The corporate tax rate
is 40 percent. Northwest’s treasurer is trying to determine the
corporation’s current weighted average cost of capital in order
to assess the profitability of capital budgeting projects.
Historically, the corporation’s earnings and dividends per

20. share have increased about 6.4 percent annually and this should
continue in the future. Northwest’s common stock is selling at
$73 per share, and the company will pay a $4.60 per share
dividend (D1).
The company’s $114 preferred stock has been yielding 10
percent in the current market. Flotation costs for the company
have been estimated by its investment banker to be $8.00 for
preferred stock.
The company’s optimum capital structure is 60 percent debt,
25 percent preferred stock, and 15 percent common equity in the
form of retained earnings. Refer to the following table on bond
issues for comparative yields on bonds of equal risk to
Northwest.
Data on Bond Issues
Issue
Moody’s
Rating
Price
Yield to Maturity
Utilities:
Southwest electric power––7 1/4 2023
Aa2
$
940.18

21. 8.35
%
Pacific bell––7 3/8 2025
Aa3
900.25
8.88
Pennsylvania power & light––8 1/2 2022
A2
970.66
8.88
Industrials:
Johnson & Johnson––6 3/4 2023
Aaa
890.24
8.66
%
Dillard’s Department Stores––7 3/8 2023
A2
950.92
8.66

22. Marriott Corp.––10 2015
B2
1,080.10
9.55
a.
Compute the cost of debt, Kd (use the accompanying table—
relate to the utility bond credit rating for yield.) (Do not round
intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Cost of debt
%
b.
Compute the cost of preferred stock, Kp. (Do not round
intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Cost of preferred stock
%
c.
Compute the cost of common equity in the form of retained
earnings, Ke. (Do not round intermediate calculations. Input
your answer as a percent rounded to 2 decimal places.)
Cost of common equity
%
d.

23. Calculate the weighted cost of each source of capital and the
weighted average cost of capital. (Do not round intermediate
calculations. Input your answers as a percent rounded to 2
decimal places.)
Weighted Cost
Debt (Kd)
%
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Ka)
%
24.
value:
2.00 points
Delta Corporation has the following capital structure:
Cost
(aftertax)
Weights
Weighted
Cost
Debt (Kd)

24. 6.1
%
30
%
1.83
%
Preferred stock (Kp)
7.6
20
1.52
Common equity (Ke) (retained earnings)
13.1
50
6.55

25. Weighted average cost of capital (Ka)
9.90
%
a.
If the firm has $23 million in retained earnings, at what size
capital structure will the firm run out of retained
earnings? (Enter your answer in millions of dollars (e.g., $10
million should be entered as "10").)
Capital structure size (X)
$ million

26. b.
The 6.1 percent cost of debt referred to earlier applies only to
the first $6 million of debt. After that, the cost of debt will go
up. At what size capital structure will there be a change in the
cost of debt? (Enter your answer in millions of dollars (e.g., $10
million should be entered as "10").)
Capital structure size (Z)
$ million
26.
value:
2.00 points
Eaton Electronic Company’s treasurer uses both the capital
asset pricing model and the dividend valuation model to
compute the cost of common equity (also referred to as the
required rate of return for common equity).
Assume:
Rf
=
8
%
Km
=
13
%
β
=
1.5

27. D1
=
$.90
P0
=
$16
g
=
9
%
a.
Compute Ki (required rate of return on common equity based on
the capital asset pricing model). (Do not round intermediate
calculations. Input your answer as a percent rounded to 2
decimal places.)
Ki
%
b.
Compute Ke (required rate of return on common equity based on
the dividend valuation model). (Do not round intermediate
calculations. Input your answer as a percent rounded to 2

28. decimal places.)
Ke
%
Income $1,627,500 $330,000 $131,250 $341,250 $825,000
EXPENSES
Variable
Musicians $337,500 $75,000 $37,500 $75,000 $150,000
Rental of auditorium $112,500 $25,000 $12,500
$25,000 $50,000
Dancers' compensation $315,000 $70,000 $35,000
$70,000 $140,000
Total Variable Costs $765,000 $170,000 $85,000 $170,000
$340,000
Contribution Margin $862,500 $160,000 $46,250 $171,250
$485,000
Module 2 - Home
COST–VOLUME–PROFIT ANALYSIS
Modular Learning Outcomes
Upon successful completion of this module, the
student will be able to satisfy the following outcomes:
• Case

29. o Apply break-even analysis to a business scenario.
• SLP
o Identify special pricing issues.
• Discussion
o Analyze modern managerial accounting models.
Module Overview
Cost-volume-profit (CVP) analysis helps managers
understand the interrelationships among cost, volume,
and profit by focusing their attention on the
interactions among the prices of products, volume of
activity, per-unit variable costs, total fixed costs, and
mix of products sold. It is a vital tool used in many
business decisions such as deciding what products to
manufacture or sell, what pricing policy to follow, what
marketing strategy to employ, and what type of
production facilities to acquire.
The variable costing income statement is helpful to
managers in judging the impact on profits of changes
in selling price, cost, or volume.
Sales, variable expenses, and contribution margin can
also be expressed on a per-unit basis or as a
percentage.
Contribution margin ratio (CM ratio)
The CM ratio is calculated by dividing
the total contribution margin by total sales.
The CM ratio can also be calculated by dividing the
contribution margin per unit by the selling priceper

30. unit.
Break-even analysis
The break-even point can be computed using either
the equation method or the contribution margin
method.
The equation method is based on the contribution
approach income statement.
The equation can be stated in one of two ways:
Profits = (Sales – Variable expenses) – Fixed
Expenses
or
Sales = Variable expenses + Fixed expenses +
Profits
The contribution margin method has two key
equations:
Break-even point in units sold = Fixed expenses
divided by CM per unit
Break-even point in sales dollars = Fixed expenses
divided by CM ratio
The margin of safety
The margin of safety is the excess of budgeted (or
actual) sales over the break-even volume of sales.
Cost structure refers to the relative proportion of

31. fixed and variable costs in an organization. Managers
often have some latitude in determining their
organization's cost structure.
There are advantages and disadvantages to high
fixed cost (or low variable cost) and low fixed cost (or
high variable cost) structures.
An advantage of a high fixed cost structure is that
income will be higher in good years compared to
companies with a lower proportion of fixed costs.
A disadvantage of a high fixed cost structure is that
income will be lower in bad years compared to
companies with a lower proportion of fixed costs.
Companies with low fixed cost structures enjoy greater
stability in income across good and bad years.
Operating leverage
Operating leverage is a measure of how sensitive
net operating income is to percentage changes in
sales.
The degree of operating leverage is a measure, at any
given level of sales, of how a percentage change in
sales volume will affect profits. It is computed as
follows:
Degree of operating leverage = Contribution
margin divided by net operating income
The degree of operating leverage is not a constant—

32. like unit variable cost or unit contribution margin—that
a manager can apply with confidence in a variety of
situations. The degree of operating leverage depends
on the level of sales and must be recomputed each
time the sales level changes. Also, note that operating
leverage is greatest at sales levels near the break-
even point and it decreases as sales and profits rise.
Module 2 - Background
COST–VOLUME–PROFIT ANALYSIS
Cost–Volume–Profit Analysis
We start with two interactive presentations on the
topic.
Cost-Volume-Profit Analysis. (2014). Pearson
Learning
Solution
s, New York, NY. Retrieved
fromhttp://www.pearsoncustom.com/mct-
comprehensive/asset.php?isbn=1269879944&id=12139
Using CVP Analysis Methods to Plan Profits. (2014).
Pearson Learning