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Leverage and Capital Structure

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Integrative-Multiple Leverage measures and prediction Carolina Fastener, INC makes a patented marine bulkhead latch that wholesales for $6.00. Each latch has variable operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays $13,000 interest and preferred dividends of $7,000 per year. At this point, the firm is selling 30,000 latches per year and is taxed at a rate of 40%.

a. Calculate Carolina Fastener's operating breakeven point.
b. On the basis of the firm's current sales of 30,000 units per year and its interest and preferred dividend costs, calculate its EBT and earnings available for common.
c. Calculate the firm's degree of operating leverage (DOL).
d. Calculate the firm's degree of financial leverage (DFL).
e. Calculate the firm's degree of total leverage (DTL)
f. Calculate Fastener has entered into a contract to produce and sell an additional 15,000 latches in the coming year. Use the DOL, DFL, and DTL to predict and calculate the changes in EBIT and earnings available for common. Check your work by simple calculation of Carolina Fastener's EBIT and earnings available for common, using the basic information given.

2. Various capital structures Charter Enterprises currently has $1 million in total assets and is totally equity-financed. It is contemplating a change in its 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?

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Solution Summary

Excel file shows calculation of break-even point,degree of operating leverage (DOL), degree of financial leverage (DFL), degree of total leverage (DTL) and 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%

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