A Company Has an EBIT of $4 Million,and Its Degree

Multiple Choice

A company has an EBIT of $4 million,and its degree of total leverage is 2.4.The firm's debt consists of $20 million in bonds with a YTM of 10%.The company is considering a new production process that will require an increase in fixed costs but a decrease in variable costs.If adopted,the new process will result in a degree of operating leverage of 1.4.The president wants to keep the degree of total leverage at 2.4.If EBIT remains at $4 million,what dollar amount of bonds must be outstanding to accomplish this (assuming the yield to maturity remains at 10%) ?

A) $16,666,667
B) $17,500,000
C) $18,375,000
D) $19,293,750
E) $20,258,438