Financial Management:Leverage and Capital Structure
Text: Chapter 13
JMC Corp. sells 500,000 bottles of its herbal soda drinks per year. Each bottle produced is sold for $0.45 and has a variable cost of $0.25. The fixed operating costs for the firm are $50,000. The corporate tax for the firm is 40%.
Requirements:
Calculate Business Risk
Calculate the Operating Leverage or Degree of Operating Leverage (DOL) for JMC Corp.
JMC Corp. also wants to double its sales to 1,000,000 bottles next year. Towards that it plans to restructure its capital. It is currently financed entirely by equity of $200,000. It plans to reduce its equity 50% and borrow long-term debt of $200,000 @ 5% interest cost.
Calculate the new:
Degree of Operating Leverage (DOL), This is the only portion the calculations and a short analysis for.
Submit analysis as a Word document, summarizing your key findings.
