Ms. Gold is in the widget business. She currently sells 1.0 million widgets a year at $8 each. Her variable cost to produce the widgets is $6 per unit, and she has $1,610,000 in fixed costs. Her sales-to-assets ratio is eight times, and 30 percent of her assets are financed with 11 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 35 percent.

Her sister-in-law, Ms. Silverman, says Ms. Gold is doing it all wrong. By reducing her price to $7.50 a widget, she could increase her volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $6 per unit. Her sales-to-assets ratio would be 8.0 times. Furthermore, she could increase her debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.