5. A review of the degree of total leverage

You and your colleague, Annie, are currently participating in a finance internship program at Carter Chemical Company. Your current assignment is to work together to review Carters current and projected income statements. You will also assess the consequences of managements capital structure and investment decisions on the firms future riskiness. After much discussion, you and Annie decide to calculate Carters degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this years data to gain insights into Carters risk levels.

The most recent income statement for Carter Chemical Company follows. Carter is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding.

Sales Less: Variable costs Gross profit Less: Fixed operating costs Net operating income (EBIT) Less: Interest expense Taxable income (EBT) Less: Tax expense (40%) Net income Earnings per share (EPS) This Year's Data $60,000,000 36,000,000 24,000,000 12,000,000 12,000,000 1,200,000 10,800,000 4,320,000 $6,480,000 $3.24 Next Year's Projected Data $64,500,000 38,700,000 25,800,000 12,000,000 13,800,000 1,200,000 12,600,000 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. Carter Chemical Company Data DOL (Sales = $60,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $60,000,000) DOL -2.00 or 7.50 or 1.87 DFL -7.50 or 1.11 or 1.87 DTL - 7.50 or 2.22 or 1.87 Everything else remaining constant, assume Carter Chemical Company decides to immediately repay 50% of a bank loan prior to its maturity. How would this affect Carter's DOL, DFL, and DCL? The DOL would be expected to The DFL would be expected to The DTL would be expected to [REMAIN CONSTANT/DECREASE/ INCREASE]