Question

mngt 101 guided notes: week 7 wednesday
directions: use the slides to help you fill out the guided notes and answer the questions. be sure to explain your thoughts completely
slides

1. what is equity? explain.
2. define opportunity cost of capital:
3. what is the formula for opportunity cost of capital?

example: if you invest $1,000 in a savings account earning 2% vs. a t - shirt business earning 10%. what is the formula?
discussion:

• which would you choose, and why?
• how does this apply to ava deciding between investing in new equipment or saving cash?

1. what is the definition of break - even analysis?
2. what is the purpose of break - even analysis?
3. what is the formula for break - even analysis?

example: fixed costs = $1,000; selling price = $25; variable cost = $15. what is the formula?

Explanation:

1. Equity represents ownership interest in a firm. It's the residual claim on assets after liabilities are paid off.
2. The opportunity cost of capital is the return an investor forgoes by choosing one investment over another. It's based on the risk - return profile of alternative investments.
3. There isn't a single standard formula but conceptually, it can be thought of as the expected return of the best - forgone alternative. In the example, if choosing the savings account, the opportunity cost is the 10% return from the T - shirt business.
4. Break - even analysis determines the level of sales at which total revenue equals total costs, resulting in zero profit.
5. The purpose is to help businesses know the minimum output or sales volume needed to cover all costs and avoid losses, aiding in decision - making about production levels, pricing, etc.
6. The basic formula for break - even quantity (BEQ) is $BEQ=\frac{Fixed\ Costs}{Selling\ Price - Variable\ Cost}$. In the example, $BEQ=\frac{1000}{25 - 15}=100$ units.

Answer:

1. Equity is ownership interest in a firm, the residual claim on assets after liabilities are settled.
2. The opportunity cost of capital is the return forgone from the best alternative investment.
3. Conceptually, it's the expected return of the best - forgone alternative.
4. Break - even analysis is the determination of the sales level where total revenue equals total costs for zero profit.
5. Its purpose is to find the minimum sales volume to cover costs and avoid losses for decision - making.
6. The formula for break - even quantity is $BEQ=\frac{Fixed\ Costs}{Selling\ Price - Variable\ Cost}$, and for the example, the break - even quantity is 100 units.