Gibson Company sales for the year 2013 were $3 million. The firm's variable operating cost ratio was
Question:
a. Calculate Gibson's degree of combined leverage for 2013.
b. Gibson is forecasting a 10 percent increase in sales for next year (2014). Furthermore, the firm is planning to purchase additional labor-saving equipment, which will increase fixed costs by $150,000 and reduce the variable cost ratio to
0.475. Financing this equipment with debt will require additional bank loans of $500,000 at an interest rate of 12.5 percent. Calculate Gibson's expected degree of combined leverage for 2014.
c. Determine how much Gibson must reduce its debt in 2014 (for example, through the sale of common stock) to maintain its DCL at the 2013 level.
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Contemporary Financial Management
ISBN: 978-1285198842
13th edition
Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Question Posted: