Abstract
Presentation of different questions of corporate finance with cases and exercises.
Extract of the document:
"Old friends Jane and Elizabeth have decided to open up a retail music store. They will open up a store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public.
1) Their first decision is to determine if they can profit from this venture, so they must perform a Breakeven Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. They also will have a small advertising budget of $300 per month for a website, posters, and ads in music magazines. Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate (1% per month). The CDs cost them an average of $12 each, and they will sell them for $20 each. Calculate how many CDs they will need to sell each month in order to Breakeven (have a Net Income of zero)."
The purpose of a breakeven analysis is to study the profitability and particularly to show the breakeven point: from what point the profit will begin? In our case we have to show, with all the costs that our two friends have to support, how many CDs are necessary to sell to begin to make profit. To be successful in this action we will apply this principle: In order to calculate the breakeven, Net Income has to be equal to 0. It is the reason why we understand that Interests have to be equal to the EBIT."
