# Would the new situation expose the firm to more or less business risk than the old one?

Learning Goal: I’m working on a finance question and need guidance to help me learn.Gamut Satellite Inc. produces satellite earth stations that sell for \$150,000 each. The firm’s fixed costs, F, are \$1.5 million, 20 earth stations are produced and sold each year, profits total \$400,000, and the firm’s assets (all equity financed) are \$5 million. The firm estimates that it can change its production process, adding \$10 million to assets and \$500,000 to fixed operating costs. This change will reduce variable costs per unit by \$5,000 and increase output by 30 units. However, the sales price on all units must be lowered to \$140,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 18%, and it uses no debt.Determine the variable cost per unitDetermine the new profit if the change is madeWhat is the incremental profit?What is the projects expected rate of return for the next year (defined as the incremental profit divided by the investment)?Should the firm make the investment? Why or why not?Would the firm’s break-even point increase or decrease if it made the change?Would the new situation expose the firm to more or less business risk than the old one? Show workingsSuppose IWT has decided to distribute \$50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about \$1,937.5 million; it has \$387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding.(1) Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share?2) Now suppose that IWT has just made the \$50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share?(3) Suppose instead that IWT has just made the \$50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?
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