FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.
-
Upload
hilary-mcdowell -
Category
Documents
-
view
216 -
download
1
Transcript of FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.
![Page 1: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/1.jpg)
FINANCE FINAL PROJECTMINI CASE # 1 FROM CHAPTER 12
By: Siraj Haq
![Page 2: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/2.jpg)
SCENARIO• I am a new hire Financial Analyst for
a highly leveraged Ski manufacturer “SKI PALACE” in Colorado’s Rocky Mountains.
• The company manufacturers only one product..
State of the Art snow ski called ‘SNOOKI’
![Page 3: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/3.jpg)
SCENARIO• Meeting next week with CFO, Maria Sanchez
• To help her discuss the business and financial risks with the CEO, she has asked me to prepare an analysis focused on these 3 questions…
Q1. What is the firms break-even point in sales dollars?
Q2. If sales should increase by 30%(as president expects), by what percentage would the EBT(earnings before taxes) and net income increase?
Q3. Prepare another income statement using sales with new 30% increase.
![Page 4: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/4.jpg)
COST STRUCTURE OF THE COMPANY• The following information is provided.
Output level 80,000 units
Operating assets $4,000,000
Operating asset turnover 8 times
Return on operating assets 32 %
Degree of operating leverage 6 times
Interest expense $600,000
Tax rate 35%
![Page 5: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/5.jpg)
WORKING PLAN?
Prepare Current Income
statement
Determine the Break-Even Point
(BEP)
Analyze how EBIT, EBT and NI change if 30%
increase in sales
Prepare supporting
documents and a new Income
Statement
![Page 6: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/6.jpg)
![Page 7: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/7.jpg)
WHAT IS A BREAK-EVEN POINT???
• The Break-even Point is the level of output (in sales or in units) that allows the company to cover all of its variable costs.
• The Breakeven Point (in sales dollars or units) is a very important figure because it is this figure that enables the manager to make a decision as to whether or not the firm should stay in business.
![Page 8: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/8.jpg)
WHAT IS A BREAK-EVEN POINT???
The Break Even Analysis enables the CFO:
1. Determine the quantity of output that must be sold to cover all the operating costs
2. Calculate the EBIT , that will be achieved at various output levels
At the break even quantity of output EBIT is equal to ZERO
![Page 9: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/9.jpg)
OTHER IMPORTANT TERMS ???
Operating Leverage• The level to which a company is dependent on sales of
individual products.• A company with only a few sales has a high operating
leverage because it must use these few sales to pay its operating expenses. • On the other hand, a company with many sales has a low
operating leverage and may therefore sell more or fewer products without it affecting its profitability as much
![Page 10: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/10.jpg)
OTHER IMPORTANT TERMS ???
Fixed CostsCosts that do no vary in total dollar amount as sales
volume or quatitiy of output changes
Ex : Administrative salariesDepreciationInsuranceProperty taxesRent
![Page 11: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/11.jpg)
OTHER IMPORTANT TERMS ???
Variable CostsCosts that fixed amount per unit of output, but vary in
total as the output changes
Ex : Direct LaborDirect materialsEnergy costspackagingsales commisions
![Page 12: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/12.jpg)
STEP 1 : WHAT IS THE REVENUE OF SKI PALACE?
Operating Asset turnover =
Solving for Revenue ( Sales) gives us
Revenue ( Sales) = Operating Asset turnover * Operating Assets
Revenue ( Sales) = 8 * $4,000,000.00
Revenue ( Sales) = $32,000,000.00
![Page 13: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/13.jpg)
STEP 2 : WHAT IS THE OPERATING PROFIT MARGIN OF SKI PALACE?
Operating profit Margin =
Operating profit Margin =
Operating profit Margin = 0.04 or 4 %
![Page 14: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/14.jpg)
STEP 3 : WHAT IS THE EARNINGS BEFORE INTEREST AND TAXES (EBIT) OF SKI PALACE?
EBIT = Revenue (sales) * Operating profit margin
EBIT = $32,000,000.00 * 0.04
EBIT = $1,280,000.00
![Page 15: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/15.jpg)
STEP 4: WHAT IS THE REVENUE BEFORE FIXED COSTS OF SKI PALACE?
Revenue before Fixed Cost = EBIT * Degree of operating
Leverage
Revenue before Fixed Cost = $1,280,000.00 * 6
Revenue before Fixed Costs = $7,680,000.00
![Page 16: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/16.jpg)
STEP 5: WHAT IS THE TOTAL VARIABLE COSTS
OF SKI PALACE?
Total variable cost = Revenue (sales) - Revenue before Fixed Cost
Total variable cost = $32,000,000 - $7,680,000
Total Variable cost = $24,320,000.00
![Page 17: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/17.jpg)
STEP 6: WHAT IS THE TOTAL FIXED COSTS OF SKI PALACE?
Total Fixed cost = Revenue before - EBITFixed Cost
Total Fixed cost = $7,680,000 - $1,280,000
Total Fixed cost = $6,400,000.00
![Page 18: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/18.jpg)
STEP 7: WHAT IS THE PRICE PER UNIT OF A A ‘SNOOKI’ BY THE SKI
PALACE?
Price per unit =
Price per unit =
Price per Snooki = $400.00
![Page 19: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/19.jpg)
STEP 8: WHAT IS THE VARIABLE COST PER UNIT OF A ‘SNOOKI’ BY THE SKI PALACE?
Variable Cost per unit =
Variable Cost per unit =
Variable Cost per Snooki = $304.00
![Page 20: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/20.jpg)
STEP 9: WHAT IS THE BREAK-EVEN POINT IN UNITS OF THE SKI PALACE?
Break-Even Point =
Break-Even Point =
Break-Even Point = 66,666 units
![Page 21: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/21.jpg)
STEP10: WHAT IS THE BREAK-EVEN POINT IN SALES OF THE SKI PALACE?
Break-Even Point =
Break-Even Point =
Break-Even Point is sales = $ 26,666,666.67
![Page 22: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/22.jpg)
Prepare Current Income statement
![Page 23: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/23.jpg)
INCOME STATEMENT 2012 SEASON
Revenue (sales) $32,000,000.00
Variable Costs ($24,320,000.00)
Revenue before fixed Costs $7,680,000.00
Fixed Costs ($6,400,000.00)
EBIT $1,280,000.00
Interest Expense ($600,000)
Earnings before taxes $680,000.00
Taxes Expense (35%) (238,000)
Net Income $442,000.00
![Page 24: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/24.jpg)
Analyze how EBIT, EBT and NI change if 30%
increase in sales
![Page 25: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/25.jpg)
Q2. IF SALES AT THE SKI PALACE WERE TO INCREASE BY 30 % ?
Degree of Operating Leverage =
% change in EBIT = Degree of Operating Leverage * % change in Revenue(sales)
% change in EBIT = 6 * 30%
% change in EBIT = 180 %
![Page 26: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/26.jpg)
Q2. IF SALES AT THE SKI PALACE WERE TO INCREASE BY 30 % ?
The New Revenue(sales) = Old sales = 30 %
The New EBIT = The previous EBIT + 180 %
Revenue before fixed cost remains the same
The New EBT = The EBIT – the interest expense
The New Net Income = The new EBT – (.35 of the new EBT)
![Page 27: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/27.jpg)
Preparing the New Income Statement
![Page 28: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/28.jpg)
INCOME STATEMENT WITH 30% SALES INCREASE
Revenue (sales) $41,600,000.00 30%
Variable Costs ($31,616,000.00)
Revenue before fixed Costs $9,984,000.00
Fixed Costs ($6,400,000.00)
EBIT $3,584,000.00 180%
Interest Expense ($600,000)
Earnings before taxes $2,984,000.00 339%
Taxes Expense (35%) ($1,044,400)
Net Income $1,939,600.00 339%
![Page 29: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/29.jpg)
IMPORTANCE OF OPERATING LEVERAGE
• Because of the Operating leverage, any percentage change in change in sales results in a much greater percentage fluctuation in the EBIT and even greater in the EBT (earnings before tax).
• Operating leverage therefore should be handled with care, a good financial manager should be very careful when introducing fixed costs into the capital structure.
![Page 30: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/30.jpg)
DEGREE OF FINANCIAL LEVERAGE
Degree of Financial Leverage = EBIT / (EBIT-Interest)
Degree of Financial Leverage =
Degree of Financial Leverage = 1.882
![Page 31: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/31.jpg)
DEGREE OF COMBINED LEVERAGE
Degree of Combined Leverage = Degree of Financial Leverage * Degree of Operating Leverage
Degree of Combined Leverage = 1.882 * 6
Degree of Combined Leverage = 11.292
![Page 32: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/32.jpg)
DEGREE OF COMBINED LEVERAGE USED AS PROOF
% Change in EBT = % change in sales * Degree of Combined Leverage
% Change in EBT = 30% * 11.292 = 338.76 or 339%
As shown in the new income statement, the % change in the New EBT is also 339%Thus we can conclude our calculations are done correctly
![Page 33: FINANCE FINAL PROJECT MINI CASE # 1 FROM CHAPTER 12 By: Siraj Haq.](https://reader035.fdocuments.us/reader035/viewer/2022081603/56649dc45503460f94ab6a66/html5/thumbnails/33.jpg)
THANK YOU
ANY QUESTIONS ??