Three Questions: Q1, Q2 & Q3 (All must be answered)

Q1: Dime a Dozen Diamonds makes synthetic diamonds by treating carbon.
Each diamond can be sold for $100.
The materials cost for a standard diamond is $30. The fixed costs
incurred each year for factory upkeep and administrative expenses are
$200,000. The machinery costs $1 million a year and is depreciated
straight-line over 10 years to a salvage value of zero.
						
a. What is the accounting break-even level of sales in terms of number
of diamonds sold?
						
b. What is the NPV break-even sales assuming a tax rate of 35 percent,
a 10-year project life and a discount
rate of 12 percent?

For solution:						
In part a, enter the formula to calculate the break-even point. In
part b, enter the formulas to calculate	all the unknown items (you
will know that your formulas are correct if the NPV is approximately
equal to 0.
							
a. What is the accounting break-even level of sales in terms of number
of diamonds sold?
							
Accounting break-even point		FORMULA	diamonds				
							
b. What is the NPV break-even sales assuming a tax rate of 35 percent,
a 10-year project life and a discount
rate of 12 percent?							
							
Number of diamonds	5,978						
Annuity factor	        5.650 						
Revenue	                FORMULA						
Variable Expenses	FORMULA						
Depreciation	        FORMULA						
Fixed expenses							
Cash Flow	        FORMULA						
Present value of cash flow	$0.00 						
Net present value	($1,000,000.00)						
							
Q2:A project has fixed costs of $1,000 per year, depreciation charges
of $500 a year, revenue of $6,000 a year, and
variable costs equal to two-thirds of revenues.						
						
a. If sales increase by 5 percent, what will be the increase in pretax
profits?
						
b. What is the degree of operating leverage of this project?						
						
c. Confirm that the percentage change in profits equals DOL times the
percentage change in sales.

Enter formulas to solve this problem.						
						
a. If sales increase by 5 percent, what will be the increase in pretax
profits?
						
	      Before	    After				
Revenue		FORMULA				
Variable costs	0   	    0   				
Fixed costs	      1,000       ?					
Depreciation	500   	 ?				
Pretax profit	($1,500)    $0 				
						
b. What is the degree of operating leverage of this project?						
						
Degree Operating Leverage		FORMULA				
						
c. Confirm that the percentage change in profits equals DOL times the
percentage change in sales.
						
Percentage change in profits		-100%				
DOL x % change in sales		0%				
						
Q3:Having heard about IPO underpricing, I put in an order to my broker
for 1,000 shares of every IPO he can get me. After 3 months, my
investment record is as follows:
						
IPO	Shares 	Price per				
return	Allocated to Me	Share	Initial			
A	500	$10 	7%			
B	200	20   	12%			
C	1,000	8   	-2%			
						
a. What is the average underpricing of this sample of IPOs?						
						
b. What is the average initial return on my "portfolio" of shares
purchased from the four IPOs I bid on?
Calculate the average initial return weighting by the amount of money
invested in each issue.
						
c. Why have I performed so poorly relative to the average initial
return on the full sample of IPOs? What lessons do you draw from my
experience?

Enter formulas to calculate the requirements of this problem.						
						
a. What is the average underpricing of this sample of IPOs?						
Average underpricing	FORMULA					
						
b. What is the average initial return on my "portfolio" of shares
purchased from the four IPOs I bid on?
Calculate the average initial return weighting by the amount of money
invested in each issue.
						
	Investment	Initial				
	(Shares x price)	Return	Profit			
A	FORMULA	7%	FORMULA			
B	FORMULA	12%	FORMULA			
C	FORMULA	-2%	FORMULA			
Total	$0 		$0 			
						
Average return	FORMULA					
						
c. Why have I performed so poorly relative to the average initial
return on the full sample of IPOs? What lessons do you draw from my
experience?