Question
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
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.
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