Answer:
1) Unlevered Beta = 0.94
2) Firm makes loss of -$12,000 when makes 7,000 watches.
3) Firms makes profit of $128,000 when it makes 17,000 watches.
4) The firm needs to make 7858 watches for break even point.
Explanation:
1) The formula for finding un levered beta is =Levered Beta/1+(1-t)*Debt/Equity
Levered Beta = 1.85
T= 0.35
Debt= 10.8
Equity= 7.2
Debt/Equity=1.5
Unlevered Beta = 1.85/1+(0.65*1.5)
Unlevered Beta = 0.936
2) Watch price = $26
Fixed costs 110,000, variable cost 12 per watch.
If the firm sells 7,000 watches the revenue is (7000*26)=182,000
The cost for making 7000 watches is 110,000+ (7000*12)=194,000
Profit/Loss= 182,000-194,000= -12,000
Firm makes loss of $12,000 when makes it 7,000 watches.
3) When it makes 17,000 watches
Revenue = 17000*26= 442,000
Cost = 110,000+ (17000*12)=314,000
Profit/Loss= 442,000-314,000=128,000
Firms makes profit of $128,000 when it makes 17,000 watches.
4) Break even formula
If X is the number of watches made than the fixed costs plus variable cost per watch multiplied by x should be equal to revenue which is price multiplied by x so
110,000+12x=26x
110,000=14x= 7858
The firm needs to make 7858 watches for break even point.
