McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65 (Variable cost / Sales). The firm has a $30 million, 10 percent bank loan. McGeeâs marginal tax rate is 40 percent. Sales are expected to be $80 million.

a. Compute McGeeâs degree of operating leverage at an $80 million sales level. Explain the result.

Sales = ??
VC = Variable Cost = ??
FC = Fixed Cost = ??
EBIT = Sales â VC â FC = ??
DOL = (Sales â VC) / EBIT = ??
Explain ??

b. Compute McGeeâs degree of financial leverage at an $80 million sales level. Explain the result.

EBIT = ??
Interest = ??
DFL = EBIT / (EBIT â Interest) = ??
Explain ??

c. Compute MCGreeâs degree of combined leverage. Explain the result.

DCL = DOL * DFL = ??

Explain ??

d. If sales decline to $76 million, forecast McGeeâs earnings per share.

??

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Jean KeelingLv2

28 Sep 2019

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Use the financial information given in the following table to compute the firmâs (a) degree of operating leverage (DOL), (b) degree of financial leverage (DFL), and (c) degree of total leverage (DTL). The firm has no preferred stock.

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Times interest earned ratio 5.0x

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Which of the following tends to insulate management somewhat from the financial results of poor financial planning? (Pick the best answer.)

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