You and your colleague, Madison, are currently participating in a finance internship program at Torres Industries....

  

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You and your colleague, Madison, are currently participating in a finance internship program at Torres Industries. Your current assignment is to work together to review Torres's current and projected income statements. You will also assess the consequences of management's capital structure and investment decisions on the firm's future riskiness. After much discussion, you and Madison decide to calculate Torres's degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year's data to gain insights into Torres's risk levels. The most recent income statement for Torres Industries follows. Torres is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding. Sales This Year's Data Next Year's Projected Data $60,000,000 36,000,000 $64,500,000 38,700,000 Less: Variable costs Gross profit $24,000,000 $25,800,000 Less: Fixed operating costs 12,000,000 12,000,000 Net operating income (EBIT) $12,000,000 $13,800,000 Less: Interest expense Taxable income (EBT) 1,200,000 $10,800,000 1,200,000 $12,600,000 Less: Tax expense (40%) Net income 4,320,000 Earnings per share (EPS) $6,480,000 $3.24 5,040,000 $7,560,000 $3.78 Given this information, complete the following table and then answer the questions that follow. When performing your calculations, round your EPS and percentage change values to two decimal places. Torres Industries Data DOL (Sales = $60,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $60,000,000) Everything else remaining constant, assume Torres Industries decides to sell 520,000 shares of preferred stock that would pay $4 per share per year in cash dividends. How would this affect Torres's DOL, DFL, and DCL? The DOL would be expected to The DFL would be expected to The DTL would be expected to You and your colleague, Madison, are currently participating in a finance internship program at Torres Industries. Your current assignment is to work together to review Torres's current and projected income statements. You will also assess the consequences of management's capital structure and investment decisions on the firm's future riskiness. After much discussion, you and Madison decide to calculate Torres's degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year's data to gain insights into Torres's risk levels. The most recent income statement for Torres Industries follows. Torres is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding. Sales This Year's Data Next Year's Projected Data $60,000,000 36,000,000 $64,500,000 38,700,000 Less: Variable costs Gross profit $24,000,000 $25,800,000 Less: Fixed operating costs 12,000,000 12,000,000 Net operating income (EBIT) $12,000,000 $13,800,000 Less: Interest expense Taxable income (EBT) 1,200,000 $10,800,000 1,200,000 $12,600,000 Less: Tax expense (40%) Net income 4,320,000 Earnings per share (EPS) $6,480,000 $3.24 5,040,000 $7,560,000 $3.78 Given this information, complete the following table and then answer the questions that follow. When performing your calculations, round your EPS and percentage change values to two decimal places. Torres Industries Data DOL (Sales = $60,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $60,000,000) Everything else remaining constant, assume Torres Industries decides to sell 520,000 shares of preferred stock that would pay $4 per share per year in cash dividends. How would this affect Torres's DOL, DFL, and DCL? The DOL would be expected to The DFL would be expected to The DTL would be expected to