A Company Currently Sells 75,000 Units Annually

question 33

Multiple Choice

A company currently sells 75,000 units annually. At this sales level, its EBIT is $4 million, and its degree of total leverage is 2.0. The firm's debt consists of $15 million in bonds with a 9.5% coupon. The company is considering a new production method which will entail an increase in fixed costs but a decrease in variable costs, and will result in a degree of operating leverage of 1.600. The president, who is concerned about the stand-alone risk of the firm, wants to keep the degree of total leverage at 2.0. If EBIT remains at $4 million, what dollar amount of bonds must be retired to accomplish this?

• A) $6,250,000
• B) $6,907,895
• C) $6,578,947
• D) $5,937,500
• E) $5,640,625

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Definitions:

Herfindahl-Hirschman Index

A measure used to assess the level of market concentration and competition among firms in an industry.

National CineMedia

A cinema advertising company that operates in the United States, providing in-theatre advertising and promotional products.

Herfindahl-Hirschman Index

A measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.

Proposed Merger

A plan or intent to combine two or more companies into one.