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

question 12

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 11.60%.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 11.60%) ?

• A) $14,367,816
• B) $16,091,954
• C) $16,810,345
• D) $16,666,667
• E) $15,229,885

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