Break-Even Analysis: Debt vs. Equity Financing PPT

This PPT slide, part of the 106-slide Corporate Performance Measurement PowerPoint presentation, presents a financial analysis focused on break-even calculations for a factory purchase, specifically examining the implications of financing through a mix of debt and equity. The scenario outlined involves acquiring a factory for £100K, with a financing structure of 70% debt and 30% equity.

Key assumptions include a tax rate of 40% and a cost of equity set at 15%. The breakdown of financing shows £70K financed through debt at a 7% interest rate, resulting in annual interest payments of £4.9K. The equity portion, calculated as £30K, incurs a charge of £7.5K, which is not tax-deductible.

The total after-tax profit required to break even is calculated to be £12.4K. This figure is significant as it highlights the financial burden of using equity financing compared to an all-debt approach. The slide notes that if the factory were financed entirely through debt, the break-even point would only require £7K in after-tax profits.

The takeaway here is clear: the choice of financing structure has a direct impact on the required profitability to cover costs. Any profits exceeding £12.4K would be classified as economic profits, emphasizing the importance of understanding the cost implications of different financing strategies. This analysis provides valuable insights for decision-makers evaluating their financing options and the associated financial performance metrics.

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Performance Management Shareholder Value Performance Measurement Financial Analysis