QUESTION 4 (25 Marks) (a) The Farrell Company is an all-equity-financed firm. It earns yearly operating income, after taxes, $24,000 on sales of $880,000. The tax rate of the company is 40 per cent. The company's only product, "The Farrell Desktop," sells for $200, of which $150 is a variable cost. REQUIRED 1) What is the company's yearly fixed operating cost? (4 marks) 2) What is the yearly operating breakeven point in units? In dollars? (4 marks) 3) Compute and plot the degree of operating leverage (DOL) versus quantity produced and sold for the following possible yearly sales levels: 4,000 and 5,000 units. (4 marks) 4) What does the graph that you drew (see Part a3) - and especially the company's DOL at its current sales figure - tell you about the sensitivity of the company's operating profit to changes in sales? (3 marks) (b) Putri Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 per cent bonds. The company is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 per cent interest (option 2) and half common stock at $60 per share and half 8 per cent bonds (option 3) REQUIRED 1) For an expected EBIT level of $1 million after the expansion program, calculate the earnings per share for each alternative financing method. Assume a tax rate of 40 per cent. (6 marks) 2) Construct an EBIT-EPS chart. Calculate the indifference points between alternative 1 and 2. What is your interpretation of them? (4 marks)