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George wants to know how many boxes of chocolate bars he needs to sell for $25.00 to break even....

Question:

1. George wants to know how many boxes of chocolate bars he needs to sell for $25.00 to break even. He estimates fixed operating costs of $12,500 per year and variable operating costs of $15 per box.

How many boxes must he sell to break even on operating costs?

2. George incorporates, issues 1,000 shares of common stock and declares dividends of $2 per share for the first year. He estimates his growth rate at 3% and required return is 5%.

How much is his company worth?

3. The Board of Directors of George's corporation declares a dividend to shareholders of record on Thursday April 30, 2015. When is the last day you can purchase stock in George's corporation and still receive the dividend?

Break-Even Analysis:

The break-even point (BEP) is the point where a company earns no profit and incurs no loss; it's calculated as: BEP = Fixed cost / Contribution Per Unit. A company's worth is the total value of the organization on a given date; it's usually computed by multiplying the outstanding shares by the market price of the stock.

Answer and Explanation: 1

Part 1

  • Break even point in units = Fixed cost / Contribution per unit
  • Contribution per unit = Selling price - variable cost
  • Contribution per unit = $25 - $15 = $10
  • Given fixed costs = $12,500
  • Break even point (units) = $12,500 / $10 = 1,250 units

Hence, George is required to sell 1,250 units in order to break even.


Part 2

Here we need to compute the value/price of the stock first.

Stock Value = Dividends per share (DPS) / (Required return - Growth rate)

Stock Value = $2 / (5% - 3%) = $100

Company's worth = 1,000 shares * $100 per share = $100,000


Part 3

In order to qualify for a dividend receipt, one should buy the stock three days before the record date, which is April 27, 2015, as April 30, 2015, is the record date.


Learn more about this topic:

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How to Calculate the Break-Even Point - Definition & Formula

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Chapter 5 / Lesson 28
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See how to calculate break-even point (in units and dollars). See the variables of the break-even point formula and examples. Understand the purpose of break-even analysis.


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