Hobbiton Farm grows corn, which it sells for $4per bushel
HOBBITON FARM Hobbiton Farm grows corn, which it sells for $4per bushel. Variable costs are$1 per bushel; fixed costs are $4.8 million. All costs and revenues are in cash. The only asset on Hobbiton’s balance sheet is land, which has both a book value and market value of $15 million. Hobbiton has no debt and a cost of equity capital of 12%. This represents a 4% risk-free interest rate plus an 8% premium that investors expect in exchange for bearing the risk of the investment. All earnings are distributed to the owners in the form of dividends. There are no income taxes Part I: What is Hobbiton’s break-even point? Suppose Hobbiton’s produces and sells 2.5 million bushels…
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