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10. A firm has sales of $10 million, variable costs of $5 million, EBIT of $2 million, and a… 1 answer below » 10. A firm has sales of $10 million, variable costs of $5 million, EBIT of $2 million, and a degree of combined leverage of 3.0. a. If the firm has no preferred stock, what are its annual interest charges? b. If the firm wishes to reduce its degree of combined leverage to 2.5 by reducing interest charges, what will be the new level of annual interest charges? 11. Cohen’s Bowling Emporium has a degree of financial leverage of 2.0 and a degree of combined leverage of 6.0. The breakeven sales level for View complete question » 10. A firm has sales of $10 million, variable costs of $5 million, EBIT of $2 million, and a degree of combined leverage of 3.0. a. If the firm has no preferred stock, what are its annual interest charges? b. If the firm wishes to reduce its degree of combined leverage to 2.5 by reducing interest charges, what will be the new level of annual interest charges? 11. Cohen’s Bowling Emporium has a degree of financial leverage of 2.0 and a degree of combined leverage of 6.0. The breakeven sales level for Cohen’s has been estimated to be $500,000. Fixed costs total $250,000. What effect will a 15 percent increase in sales have on EBIT? 12. • Connely, Inc., expects sales of silicon chips to be $30 million this year. Because this is a very capital-intensive business, fixed operating costs are $10 million. The variable cost ratio is 40 percent. The firm’s debt obligations consist of a $2 million, 10 percent bank loan and a $10 million bond issue with a 12 percent coupon rate. The firm has 100,000 shares of preferred stock outstanding that pays a $9.60 divi- dend. Connely has 1 million shares of common stock outstanding, and its marginal tax rate is 40 percent. Compute the following for Connely: a. Degree of operating leverage b. •EPS if sales decline by 5 percent Degree of financial leverage c. Degree of combined leverage d. INTERMEDIATE View less » Jan 07 2016 10:51 AM
