Unformatted text preview: and fixed operating costs of
$62,500. Interest is $17,500 per year. Assume that both firms are in the 40%
a. Compute the degree of operating, financial, and total leverage for
b. Compute the degree of operating, financial, and total leverage for
c. Compare the relative risks of the two firms.
d. Discuss the principles of leverage that your answers illustrate. LG2 11–14 Various capital structures Charter Enterprises currently has $1 million in total
assets and is totally equity-financed. It is contemplating a change in capital structure. Compute the amount of debt and equity that would be outstanding if the
firm were to shift to each of the following debt ratios: 10, 20, 30, 40, 50, 60,
and 90%. (Note: The amount of total assets would not change.) Is there a limit
to the debt ratio’s value? LG1 458 PART 4 LG5 Long-Term Financial Decisions 11–15 EBIT–EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the...
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