Gigi Inc.

needs assistance

in determining its degree of total leverage for two proposed

financial plans, with alternate capital structures.

Capital structures:

Financial Plan A Financial Plan B

Equity $10,000 $15,000

Debt (20% interest) $10,000 $ 5,000

$20,000 $20,000

Fixed costs: Gigi Inc. anticipates two possible scenarios

for total fixed costs:

Scenario1: $15,000

Scenario2: $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

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.