Below is Income Statement information for Frieda’s Fresh Foods Inc.
Revenue: $3,107,262 Variable costs: 30% of revenue
Fixed costs: $1,000,000
Depreciation: $475,000
Bond Issue A: $300,000 face value, 10% coupon Bond Issue B: $500,000 face value, 8% coupon Bond Issue C: $900,000 face value, 12% coupon Tax rate: 40%
Common shares issued and Outstanding: 250,000
a. Calculate the degree of operating leverage for the firm.
b. Calculate the degree of financial leverage for the firm.
c. Calculate the degree of combined leverage for the firm.
d. If the company’s sales decrease by 15%, what percentage change in EPS would you expect to observe?
e. If the sales decrease by 15%, what will the new EPS be?