Leverage

In this challenge, students will analyze both operational and financial leverage to understand their effect on the company’s earnings. Currently, the firm’s fixed operating cost is low. The firm is 100% equity financed. It can increase the fixed cost from $10,000 to $50,000 to reduce the variable cost from $9/unit to $7/unit. It also has the option of having 50% of the firm ($500,000) financed by debt at an 11% interest rate. Complete the following tasks and answer the four questions at the end based on your analysis. For each task, make sure to reference the necessary cells when possible.