Financial Management 534
Question 1
1a) 1b)
2013 2014 2014
Growth rate 8%
2013 Dividend ($m) 2.6 3.343 2.808
Net Income 9.8 12.6 10.584
Retention ratio 73.47% 73.47% 73.47%
Question 2a
Company’s Debt Financing 2.555
Financial Management 534 2
Equity Financing (65%*7.3m) 4.745
Net Income 12.60
Net Income Available for Div 7.855
Retention (Rate 73.47% 5.771
Dividend 2014 ($m) 2.084
(Rocca, 2016)
Question 2b
Company’s Debt Financing 2.555
Equity Financing (65%*7.3m) 4.745
Net Income 10.58
Net Income Available for Div 5.839
Retention (Rate 73.47% 4.290
Dividend 2014 ($m) 1.549
Question 3
Incremental profits are largely referred to as differentials as they differ from a given alternative.
Incremental analysis involves identification and comparison of different alternatives which may
result in incremental revenues or losses and also costs (Ross, Westerfield & Jaffe, 2013).
Selling price per unit ($) 100,000
Fixed Costs 2,000,000
Units sold per year 50
Profits 500,000
Increase Investments 4,000,000
Add Fixed Costs 500,000
Reduce variable costs per
unit
10,000
Increase outputs (units) 20
Financial Management 534 3
Decrease price to 95,000
Cost of Equity is % 16%
Cost of Equity 640000
Total sales $100,000x 50 $ 5,000,000.00
Fixed Costs $ 2,000,000.00
Variable Costs (5m -2m-0.5m)/50 $ 2,500,000.00
Variable costs 50,000 per unit) 500,000
Total Sales $95,000 x 70 6650000
Fixed Costs 2m + 0.5m 2,500,000
Variable Costs (50,000-10,000)per unit 2800000
Cost of Equity 16% of 4m 640,000
Profit 710,000
Incremental Profit 210,000
Expected Return Incremental Profit/investment 5.25%
(Garrison, Noreen & Brewer, 2009)
Yes the Project should be undertaken as it has registered an incremental profit of $210,000
compared with the previous investment.
Incremental Analysis
Increase in revenue $ 1,650,000.00
Increase in Costs $1440000
$ 210,000.00
Question 4
Breakeven Calculations
Total sales $100,000x 50 $ 5,000,000.00
Fixed Costs $ 2,000,000.00
Variable Costs (5m -2m-0.5m)/50 $ 2,500,000.00
Variable costs 50,000 per unit) 500,000
Contribution units Selling Price – Variable Costs 50000
Financial Management 534 4
Breakeven units FC/(Selling Price – VC) (units) 40
Total Sales $95,000 x 70 6650000
Fixed Costs 2m + 0.5m 2500000
Variable Costs (50,000-10,000)per unit 2800000
Contribution units Selling Price – Variable Costs 55000
Breakeven units FC/(Selling Price – VC) (units) 45.5
The units to breakeven increased from 40 units to 45.5 units.
Financial Management 534 5
References
Garrison, R., Noreen, W., & Brewer, P. (2009) Managerial Accounting , New York, NY:
McGraw-Hill Irwin. 65 -70
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013) Corporate finance (10th ed.) New York, NY:
McGraw-Hill Irwin.
Rocca, G. (2016) How to Calculate Residual Dividend policy,
