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Chapter 12 Problem 17
Ch 11 Advanced problem 1
ADVANCED PROBLEMS FOR SPREADSHEET APPLICATION
These problems are available in MyFinanceLab.
1.
Erosion costs. Ice Cream City plans to introduce a new flavor, wild berry, to its
current set of five flavors, which include vanilla, French vanilla, strawberry,
chocolate, and mint chocolate. The new sales of wild berry are projected as
follows:
The expected sales will come from both new customers and current customers who
switch flavors. The current projected sales for the existing flavors (assuming no
introduction of the new flavor) are
Projected Sales
However, if the company introduces wild berry, it will cut into the sales of the
original flavors based on the following estimates:
Percentage of Sales Erosion
Here are the revenue and cost per unit of ice cream for Ice Cream City:
Vanilla: current revenue of $3.05 per unit and cost of $1.22 per unit
French vanilla: current revenue of $3.15 per unit and cost of $1.38 per unit
Strawberry: current revenue of $3.25 per unit and cost of $1.41 per unit
Chocolate: current revenue of $3.25 per unit and cost of $1.57 per unit
Mint chocolate: current revenue of $3.25 per unit and cost of $1.63 per unit
Wild berry: projected revenue of $3.25 per unit and cost of $1.44 per unit
Find the annual erosion of revenue, the cost savings, and the net cash flow with the
new ice cream.
Ch 11 Advanced problem 1
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Changing WACC and optimal choice. Austin Enterprises is currently an all-equity
firm. The firm is considering selling debt (bonds) and retiring some of the equity.
However, at each level of debt, debt becomes more expensive (cost of debt is
rising), and the riskiness of the equity also rises with more and more debt. Using a
spreadsheet, determine the best combination of debt and equity for Austin
Enterprises if
The current beta of Austin Enterprises is 0.85.
The current market return is 12%.
The current risk-free rate is 3%.
The total equity is 20,000,000 shares at $25 per share.
Debt is sold in units of $2,000,000.
The first unit of debt has a cost of 7.5%.
The tax rate of Austin Enterprises is 40%.