Your company has been in business as a supplier or electricity for over 50 years. You have always made a profit. Your current sales, for the past 3 years, have been 10 Million dollars and your variable costs run at 70% of sales, or 7 Million. Your fixed costs run 2 million a year.
a)At the current level of sales, how much profit do you have after covering all for fixed and variable costs?
b)What is your break-even sales number?-assume that you variable costs run at the same %, as the term variable implies, and that your fixed costs remain at 2 million.
c) Based on your current sales of 10 million and the other information mentioned-- if your fixed costs included 1 million of depreciation (included in the 2 million), how much after-tax cash would you have available to distribute to your shareholders or to re-invest in your company (40% tax rate)
D. your company has an opportunity to buy another company in the same business for 5m. You are thinking about financing the acquisition with 10 year bonds at a coupon rate of 6%. The company you would be acquiring has been going along at a break-even and not generating any profit-you believe that it will take about 3 years for you to realize any synergies that would result in the combined operation generating more profit than your company is today. If you go ahead with your bond, will you have enough cash to cover your interest payments and also be able to retire the bond issued in 10 years?
E. You have been paying a cash dividend of $4 a share on your $200,000 outstanding shares fir the last 10 years. Do you think your current stockholders would prefer you use the bond or issue some new stock?