Problem 1. Diamond, Inc. only sells 1 carat diamond rings for $5,000. The cost of the diamonds is $2,200 per carat. Store rent is $2,000 per month and a commission is paid to the salesperson for each $1,000 ring sold. Fixed salaries amount to $20,000 per month.
- How many rings must be sold to break-even each month?
- How many rings need to be sold in order to make $50,000?
Problem 2. Using the Capital Asset Pricing Model (CAPM) calculate the expected rate of return for CommArts, Inc.
Risk free Rate of Return = 4%
Market Rate of Return = 12%
CommArts, Inc. Beta = 1.5
Problem 3. Calculate the Weighted Average Cost of Capital for CommArts, Inc. using the information below and the result of your answer in question 2.
CommArts, Inc.
Balance Sheet
Dec. 31, 2009
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Current Assets
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1,000,000
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Curent Liabilities
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1,000,000
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Long-Term Debt 8%
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10,000,000
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Property, Plant & Equip.
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25,000,000
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Equity
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15,000,000
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26,000,000
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26,000,000
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Additional Information: Market value of Equity is $16 million and the marginal tax rate is 38%.