Question

Question 2. Break-even quantity
Use the information on the table below to find the break-even quantity for a company that cultivates abalone for sale to local restaurants. Assume the company has a discount rate of 15%, and that the project has an initial investment of $840,000. Further assume that the equipment is depreciated using straight-line over the project’s 7 year life.

Sales price per abalone          $35
Variable cost per abalone       $6.10
Annual Fixed Costs                  $375,000
Tax Rate                                  .35


Question 3.
You have been hired to estimate the beta for HP and have broken the company down into 4 broad business groups. The market values and equity betas for each group are shown on the table below:
                                  Division‘s equity                                             Market Value
Business Group         Market Value               Asset Beta                Division Debt
                                  (in $billions)                                                    (in $billions)

Mainframes                     $2.0                            1.10                            $0.75
Personal Computers      $2.0                            1.50                            $0.50
Software                         $1.0                            2.00                            $1.00
Printers                           $3.0                            1.00                            $1.25


(a) Estimate the equity beta for HP as a company.
(b) If the market risk premium is 5% and the T-Bond rate is 2%, determine how much of the return HP’s shareholders’ earn is due to business (asset) risk, and how much is due to financial risk.
(c) Compute HP’s WACC

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