PT. GDAM has recently established business subsidiaries that refines CPO and further marketing it as cooking oils. This is part of the companys strategy to extend the range and reach of value-added products to its customers.

PT. AAH & PT. ABH having fixed operating costs of IDR 12.000.000.000 and uniformly maintains variable operating cost of IDR 9.000/litre and able to set a sale price of IDR 15.000/litre for its cooking oil. The firms tax bracket is 35%.

PT. AAH has capital structure consisting of 30 % debt in the form of IDR 30.000.000.000 10-year Bonds with 10% (annual) coupon rate. Whilst composition of its equity, consist of 10.000 shares of IDR 500 (annual dividend per share) preferred stock outstanding. It also has 500.000 shares of common stock outstanding. The latest annual sales figures for PT. AAH are 2.600.000 litres

PT. ABH has an IDR 40.000.000.000 Bonds with 9% (annual) coupon rate of interest, establishing its 40% debt ratio level. Structure of the equity consist of 8.000 shares of IDR 500 (annual dividend per share) preferred stock outstanding. It also has 350.000 shares of common stock outstanding. PT. ABH is 4.000.000 litres.

Question :

a. Measure the Firms Degree of Operating Leverage (DOL) 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 for PT AAH

b. Measure the firms Degree of Financial Leverage (DFL)at base level EBIT. Based on your result, explain in detail the effect of financial leverage for PT AAH

c. Measure the firms Degree of Total Leverage (DTL)using the current level of sales in Quantity as a base. Explain in detail the combined effect of operating and financial leverage on firm risk, according to your result for PT AAH

d. The firms are considering 2 alternatives capital structures: 0% debt and the current 30% debt ratio. For 0% debt capital structure, PT. AAH has 800.000 shares of common stock outstanding and no preferred stock. For 0% debt capital structure, PT. ABH has 500.000 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 level of EBIT). Decide which capital structure option i.e., with current Debt level of 30%, or with No Debt is better? Explain your result, prove with EBIT simulation.