7. The computation and interpretation of the degree of combined leverage (DCL) You and your colleague, Malik, are currently participating in a finance internship program at Carter Chemical Company. Your current assignment is to work together to review Carter'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 Malik decide to calculate Carter'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 Carter's 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 3,000,000 shares of common stock currently outstanding. Sales Less: Variable costs Gross profit This Year's Data Next Year's Projected Data $40,000,000 20,000,000 $20,000,000 $43,200,000 21,600,000 $21,600,000 Less: Fixed operating costs 8,000,000 8,000,000 Net operating income (EBIT) $12,000,000 $13,600,000 Less: Interest expense Taxable income (EBT) 800,000 $11,200,000 800,000 $12,800,000 Less: Tax expense (40%) 4,480,000 5,120,000 Net income $6,720,000 7,680,000 Earnings per share (EPS) $2.24 $2.56 Given this information, complete the following table and then answer the questions that follow. When performing your computations, round your EPS value and the percentage change values to two decimal places. Carter Chemical Company Data DOL (Sales $40,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $40,000,000) Everything else remaining constant, assume Carter Chemical Company decides to convert its labor-intensive manufacturing facility into a capital- intensive facility by laying off over 75% of its labor force and replacing the workers with robotic and technologically advanced manufacturing equipment. Assume that, over the next five years, the wages saved as a result of the layoffs will pay for the changes made to Carter's plant and equipment changes. 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 Grade It Now Save & Continue Continue without saving