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

question 5

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 10.40%.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 10.40% and is equal to the coupon rate) ? Do not round intermediate calculations.

• A) $16,025,641
• B) $12,500,000
• C) $18,429,487
• D) $12,019,231
• E) $19,391,026

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Homozygous Dominant

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