Question 1

TOR most recently sold 100,000 units at Rs 7.50 each; its variable operating cost are Rs 3.00 per unit, and its fixed cost operating costs are Rs 250,000. Annual interest charges total Rs 8000, and the firm has 8000 shares of Rs 5(annual dividend) preferred stock outstanding. It currently has 20,000 shares of common stock outstanding. Assume that the firm has a 40% tax rate.

  1. At what level of sales (in units) would the firm break even on operations?
  2. Calculate the firm’s earning per share in tabular form at
    1. the current level of sales and
    2. At 120,000 units sales level.

Marks 5

Question 2

Calculate the after tax cost of debt under each of the following conditions:

  1. interest rate, 10%; tax rate, 0 %
  2. interest rate, 10%; tax rate, 20 %
  3. interest rate, 10%; tax rate, 40 %