Question Details

What is the level of the company- fixed operating costs 



 .	Assume that a firm has a degree of financial leverage of 1.25.  If sales increase by 20 percent, the firm will experience a 60 percent increase in EPS, and it will have an EBIT of $100,000.  What will be the EBIT for this firm if sales do not increase?

a.	$113,412
b.	$100,000
c.	$ 84,375
d.	$ 67,568
e.	$ 42,115

 .	Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT).  The firm's current degree of operating leverage is 2.5.  It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units.  Last year's EBIT was $60,000.  Based on a degree of operating leverage of 2.5, what is this year's expected EBIT with the increase in sales?

a.	$ 60,000
b.	$175,000
c.	$100,000
d.	$ 90,000
e.	$114,000
 .	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 percent 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 1.6.  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 amount of bonds must be retired to accomplish this?

a.	$8.42 million
b.	$9.19 million
c.	$7.63 million
d.	$6.58 million
e.	$4.44 million
 .	A company has an EBIT of $4 million, and its degree of total leverage is 2.4.  The firm- debt consists of $20 million in bonds with a 10 percent yield to maturity.  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 amount of bonds must be outstanding to accomplish this (assuming the yield to maturity remains at 10 percent)?

a.	$16.7 million
b.	$18.5 million
c.	$19.2 million
d.	$19.8 million
e.	$20.1 million


 .	Lincoln Lodging Inc. estimates that if its sales increase 10 percent then its net income will increase 18 percent.  The company- EBIT equals $2.4 million, and its interest expense is $400,000.  The company- operating costs include fixed and variable costs.  What is the level of the company- fixed operating costs ?

a.	$  450,000
b.	$  666,667
c.	$1,200,000
d.	$2,000,000
e.	$2,125,000




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