A firm has sales of $10 million, variable cost of $5 million, EBIT of $2 million

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A firm has sales of $10 million, variable cost of $5 million, EBIT of $2 million, and a degree of combined leverage of 3.0.

 

a. If the firm has no preferred stock, what are its annual interest charges?

 

b. If the firm wishes to lower its degree of combined leverage to 2.5 by reducing interest charges, what will be the new level of annual interest charges? 

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