A Company Has an EBIT of $4 Million, and Its

question 23

Multiple Choice

A company has an EBIT of $4 million, and its degree of total leverage is 2.4. The firm's debt consists of $20 million in bonds with a YTM of 10%. The company is considering a new production process that will require an increase in fixed costs but a decrease in variable costs. If adopted, the new process will result in a degree of operating leverage of 1.4. The president wants to keep the degree of total leverage at 2.4. If EBIT remains at $4 million, what dollar amount of bonds must be outstanding to accomplish this (assuming the yield to maturity remains at 10%) ?

• A) $16,666,667
• B) $20,258,438
• C) $19,293,750
• D) $18,375,000
• E) $17,500,000

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Definitions:

Permanent Banishment

The act of expelling someone from a community, country, or organization forever, without the possibility of return.

Cooperation

The process of working together to the same end or engaging in an activity for mutual benefit.

Fundamental Attribution Error

The tendency to overemphasize personality-based explanations for behaviors observed in others while underemphasizing the role and power of situational influences.

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A phrase indicating that two or more people have similar thoughts, ideas, or patterns of thinking.