In 2019, Healthy Feedmill established 2 (two) subsidiaries that produce poultry feed products: (1) Green Feed (GF) and (2) Blue Cattle (BC). This is part of the companys grand strategy to extend the range and reach of value-added products to its customers. Production from the first subsidiary Green Feed (GF) in Lampung (Sumatera) focuses on market in Sumatera area. Production from the second subsidiary Blue Cattle (BC) in Makassar covers the area of Sulawesi and Kalimantan. Green Feed (GF) and Blue Cattle (BC) have comparable operational cost structures at the moment. Both companies have fixed operating costs of IDR8.000.000.000 and maintained variable operating cost of IDR 12.500.000/ton and sale price of IDR 20.000.000/ton for the poultry feed products. The company operates with a 25% tax bracket. During the latest annual meeting held in 2020, the CEO of Healthy Feedmill released an analysis of each subsidiary. Based on the meeting report, there are significant differences on how the two subsidiaries (GF and BC) operate and manage their financial structures.

The report contains the following information:

Green Feed (GF). Green Feed record sales of 1.200 tons of poultry feed products. Capital structure of GF consists of 40% debt in the form of IDR 40.000.000.000 8-year bonds with 8% (annual) bond coupon rate. The companys equity consists of: (a) 6.000 shares of preferred stock with dividend per share of IDR 300 (annual payment) and (b) 400.000 shares of common stocks outstanding.

Required:

a) Measure the companys degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) using the current level of sales in quantity as a base. Explain in detail the result of your calculation. Show the effect of the 20% increase in sales toward EBIT

b) The firms are considering 2 alternatives capital structures: 0% debt and the current 40% debt ratio of each company. Regarding the 0% debt capital structure:

Green Feed. GF has 600.000 shares of common stock outstanding and no preferred stock.

Blue Cattle (BC). For 0% debt capital structure, BC has 700.000 shares of common stock outstanding and no preferred stock.

Analyse the risk of each capital structure alternative by performing the EBIT-EPS analysis (you are free to choose any EBIT level). Decide which capital structure option i.e., with current debt level of 40% or 0% debt (no debt) would be more efficient for the company? Explain your analysis by presenting the EBIT simulation (5 pts).