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 11.60%. 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 11.60% and is equal to the coupon rate)? Donotroundintermediatecalculations.
A. $14,367,816
B. $16,091,954
C. $16,810,345
D. $16,666,667
E. $15,229,885
Answer: A
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