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Case 02: Deshbondhu Corporation (DC) will begin operations next year to produce a single product at a price of Tk. 12 per unit. DC has
Case 02: Deshbondhu Corporation (DC) will begin operations next year to produce a single product at a price of Tk. 12 per unit. DC has a choice of two methods of production: Method A, with variable costs of Tk. 6.75 per unit and fixed operating costs of Tk. 675,000; and Method B, with variable costs of Tk. 8.25 per unit and fixed operating costs of Tk. 401,250. To support operations under either production method, the firm requires Tk. 2,250,000 in assets, and it has established a debt ratio of 40 percent. The cost of debt is 12% i. The sales forecast for the coming year is 200,000 units. Under which method would EBIT be more adversely affected if sale did not reach the expected levels? ii. Given the firm's present debt, which method would produce the greater percentage increase in earnings per share for a given increase in EBIT? iii. Calculate DTL under each method, and then evaluate the firm's total risk under cach method
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