Title: Break-even Situation and Investment Opportunity

Your company has been in business as a supplier of electricity for over 50 years. You have always made a profit. Your current Sales for the past 3 years, have been 10M dollars and your variable costs run at 70% of Sales or 7M. Your fixed costs run 2M a year.

A. At the current level of sales, how much profit do you have after covering all your fixed and variable costs?

B. What is your break-even sales number?—assume that your variable costs run at the same %, as the term variable implies, and that your fixed costs remain at 2M.

C. Based on your current sales of 10M and other information mentioned—if your fixed costs include IM of depreciation (included in the 2M), how much after tax cash would you have available to distribute to your shareholders or 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 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 for the last 10 years. Do you think your current shareholders would prefer you use the bond or issue some more new stock? 

Number of words: 663 inclusive of the above questions