A Company Currently Sells 75,000 Units Annually

Question 1
Multiple Choice

A company currently sells 75,000 units annually.At this sales level,its EBIT is $4 million,and its degree of total leverage is 2.0.The firm's debt consists of $15 million in bonds with a 9.5% coupon.The company is considering a new production method which will entail an increase in fixed costs but a decrease in variable costs,and will result in a degree of operating leverage of 1.375.The president,who is concerned about the stand-alone risk of the firm,wants to keep the degree of total leverage at 2.0.If EBIT remains at $4 million,what dollar amount of bonds must be retired to accomplish this? A) $2,118,421.05 B) $1,381,578.95 C) $1,842,105.26 D) $1,528,947.37 E) $2,192,105.26

C