Problem #4: (37 marks) Irish Creek Distillery Limited is a levered firm with the following financial statements: Balance Sheet Income Statement Total assets $ 1,000,000 Sales $ 3,500,000 Variable costs -$ 1,200,000 Bonds (coupon rate of 8%) $ 200,000 Fixed costs -$ 1,000,000 Bonds (coupon rate of 6%) $ 300,000 Common stock (50,000 o/s) Retained earnings $ 250,000 $ 250,000 Depreciation EBIT Interest -$ 600,000 $ 700,000 ?? EBT ?? Total liability $ 1,000,000 Taxes (40%) ?? NI ?? a. Determine Irish Creek's current levels of DOL (degree of operating leverage), DFL (degree of financial leverage), and DCL (degree of combined leverage). (6 marks) b. What is the company's current EPS? (2 marks) c. If the company can increase their sales by 15%, what percentage increase in EPS would you expect to observe? (2 marks) d. If the sales increase by 15%, what will the new EPS be? (2 marks) e. What percentage change in EBIT would result from a 10% decrease in sales? (2 marks) f. What percentage change in EPS would result from a 10% decrease in sales? (2 marks) g. Irish Creek is planning to raise $400,000 through the sale of common stock at $50 per share (Plan 1) or through the issuance of debt with a 10% annual coupon rate (Plan 2). If maximization of earning per share is the goal, what is the EBIT level at which you are indifferent to the financing plan you choose? (7 marks) h. Once the expansion is completed, the sales are expected to increase to $5,000,000. Calculate the new EBIT at this level of sales. At the new EBIT which method of financing results in a higher EPS? Calculate EPS for both plans at this new EBIT. (8 marks) i. The company has decided to change Plan 1. Instead of issuing $400,000 in new common shares, the company will fund the project with $200,000 in common shares and $200,000 in preferred shares with a dividend of 3%. Plan B will remain the same. What will be the new indifference EBIT (EBIT*)? (6 marks)