Scenario A: $100\%$ Equity $($Zero Debt $$ D$/$E $=0)$

JMC firm is currently $100\%$ equity financed, with an equity of $$200,000.$ With zero debt, interest Expense $=0$

JMC Corp. sells $500,000$ bottles of its herbal soda drinks per year. Each bottle produced and sold @ a unit sales price of $$0\mathrm{.}45$ and has a unit variable cost of $$0\mathrm{.}25.$ The fixed operating costs for the firm are $$40,000.$ The corporate tax for the firm is $25\%.$

Calculate the following:

Degree of Operating Leverage $($DOL$,$ Refer $13-2$C$)$

Degree of Financial Leverage $($DFL$,$ Refer $13-2$D$)$

Degree of Total Leverage $($DTL $=$ DOL $*$ DFL$)$

$3$

Scenario B: $50\%$ Equity $50\%$ Debt $($D$/$E $=1/1)$

JMC firm restructures its capital from its equity capital of $$200,000(100\%)$ to equity of $$100,000,$ by reducing its equity to $50\%$ and borrowing long$-$term debt of $$100,000$ @ $10\%$ interest cost.

So with $100,000$ equity being replaced by $$100,000$ debt, only interest on debt are added to new fixed costs which increase from previous $$40,000$ to $$50,000$

With no new capital investment undertaken nor any change in environmental or business prospects, sales are assumed to remain unaffected and same as in the previous scenario A$.$

Calculate the new:

Degree of Operating Leverage $($DOL$,$ Refer $13-2$C$)$

Degree of Financial Leverage $($DFL$,$ Refer $13-2$D$)$

Degree of Total Leverage $($DTL $=$ DOL $*$ DFL$)$

$4$

Analyze comparing DOL, DFL$,$ and DTL in Scenarios A versus B

What does your analysis show regarding business risk?