Problem: McGonnigal, InMcGonnigal, Inc. has expected sales of $40 million. Fixed operating costs are $5 million and the variable cost ratio is 65 percent. McGonnigal has outstanding a $10 million , 10 percent bank loan and $3 million in 12 percent coupon-rate bonds. McGonnigal has outstanding 250,000 shares of $10 (dividend) preferred stock and 1 million shares of common stock ($1 par value). McGonnigal's average tax rate is 35% and its marginal rate is 40%
Question 1: What is McGonnigal's degree of operating leverage at a sales level of $40 million?
Question 2: What is McGonnigals current degree of financial leverage?
Question 3: Forecast McGonnigal's EPS if sales drop to $38 million.