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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Definitions:

Consumer Surplus

The gap between what consumers are prepared to spend on a good or service and the actual amount they end up paying.

Consumer Surplus

The divergence in total intended consumer expenditure on a product or service and the total actual expenditure.

Market Power

The ability of a company or entity to influence or control the terms and conditions of the market to some degree, affecting prices and competition.

Externalities

Financial consequences for unrelated third parties, which can manifest as either positive or negative effects.