Question 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?
Question 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
3. Calculate the Weighted Average Cost of Capital for CommArts, Inc. using the information below and the result of your answer in question 2.
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CommArts, Inc.
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Balance Sheet
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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%.