Lonestar Winery, Inc. had sales of $3,000,000 last year representing 500,000 units. The variable cost ratio is 50%. Annual fixed operating costs are $1,000,000. The company currently has $5,000,000 in debt on which it pays 5% interest per year. The corporate tax rate is 40%.

Answer the following questions. You must show your work for credit. For example, you can describe the steps you followed to arrive at your answer. Either underline or highlight your answer.

(a) (6 points) Calculate the firms DCL.

(b) (4 points) If the firm wants to maintain a DCL that is equal to its DOL, what is the maximum amount of debt the firm can have in its capital structure?