Assignments from the Readings
December 12, 2011
1. What are financial markets? What function do they perform? How would an economy be worse of without them?
Financial markets are institutions and/or procedures that help complete transactions in all types of financial claims, such as securities. Financial markets make it possible to meet the demands of the economy by allocating the supply of savings. Financial markets are related to the forces of demand and supply for a specific type of financial claim. The economy would be worse without financial markets because the wealth of the economy would be less (Keown, Martin, & Scott, 2005, p. 476). ...view middle of the document...
Organized security exchanges help investors and corporations because trading on a secondary market allows for more liquidity. Investors are also able to buy and sell the securities instantly and therefore are able to account for instant gains and losses while having fair security prices.
15-12A. (Break-even point) You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.
Return on operating assets = 25%
Operating asset turnover = 5 times
Operating assets = $20 million
Degree of operating leverage = 4 times
Return on operating assets = $20 million * .25 = $5 million
Sales = Operating asset turnover * Operating asset turnover
$5 million * 20 million = $100 million
Degree of operating leverage = Sales – Variable cost/ Return on operating assets
4 = $100 million – variable cost / 5
Variable cost = $80 million
Contribution ratio = Variable Cost / Sales
= $80 million / $100 million = 80%
Fixed cost = (Sales – Variable Cost) - Return on operating assets
= ($100 million – $80 million) – 5 = $15 million
Break even sale = Fixed cost / Contribution margin
= $15 million / .80 = $18.75 million
Per units sales price = Sales / Units = $100 million / $10 million
= $10 per unit
Break even sale (units) = Sales / Per units sales price
= $18.75 million / $10 per unit = 1,875,000 units