Doug Robinson and Dante are considering the possibility of opening their own manufacturing facility. They expect...

 

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Doug Robinson and Dante are considering the possibility of opening their own manufacturing facility. They expect first-year sales to be $800,000, and they feel that their variable costs will be approximately 40% of sales. Their fixed costs in the first year will be $200,000. Doug and Dante are considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. They can sell common stock to their relatives for $10 per share. Either way, they will need to raise $1,000,000. Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans. Doug Robinson and Dante are considering the possibility of opening their own manufacturing facility. They expect first-year sales to be $800,000, and they feel that their variable costs will be approximately 40% of sales. Their fixed costs in the first year will be $200,000. Doug and Dante are considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. They can sell common stock to their relatives for $10 per share. Either way, they will need to raise $1,000,000. Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.

Answer rating: 100% (QA)

Variable cost ratio 40 Contribution margin ratio sales varia... View the full answer