Gigi Inc. needs assistance in determining its degree of total leverage for two proposed financial plans, with alternate capital structures.

Required:

a)Calculate the degree of operating leverage for both Scenarios 1 and 2.

b)For Financial Plan A, calculate the degree of financial leverage and the degree of total leverage for both Scenarios 1 and 2.

c)For Financial Plan B, calculate the degree of financial leverage and the degree of total leverage for both Scenarios 1 and 2.

d)Identify which combination of scenario and financial plan is the LEAST risky. Identify which combination is the most risky. Explain why.

Capital structures: Equity Debt (20% interest) Financial Plan A A $10,000 $10,000 $20,000 Financial Plan B $15,000 $ 5,000 $20,000 Fixed costs: Gigi Inc. anticipates two possible scenarios for total fixed costs: Scenario 1: $15,000 Scenario 2: $20,000 Additional information: Capacity: 4,000 units Actual production and sales: 75% of the capacity Selling price: $30 per unit Variable cost: $15 per unit Capital structures: Equity Debt (20% interest) Financial Plan A A $10,000 $10,000 $20,000 Financial Plan B $15,000 $ 5,000 $20,000 Fixed costs: Gigi Inc. anticipates two possible scenarios for total fixed costs: Scenario 1: $15,000 Scenario 2: $20,000 Additional information: Capacity: 4,000 units Actual production and sales: 75% of the capacity Selling price: $30 per unit Variable cost: $15 per unit