Doug Robinson Is Considering the Possibility of Opening His Own

question 68

Essay

Doug Robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be $800,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be $200,000.
Doug is considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $1,000,000.
-Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.

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Definitions:

Response

A reaction to a specific stimulus or situation, which can be physiological, emotional, or behavioral.

Unconditioned Response

A natural, automatic reaction to a stimulus that occurs without previous conditioning.

Unlearned Reaction

An instinctual or reflexive response that occurs without prior learning or experience, typically innate and common in human and animal behavior.

Previous Conditioning

The learning or training that an individual has received in the past, which influences their current behavior or reactions.