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    Capital structure

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    McFrugal Inc. has expected sales of $20 million. Fixed operating costs are $2.5 million, and the variable cost ratio is 65 percent. McFrugal has outstanding a $12 million, 8 percent bank loan. The firm also has outstanding 1 million shares of common stock ($1 par value). McFrugal's tax rate is 40 percent.

    a) What is McFrugal's degree of operating leverage at a sales level of $20 million?

    b) What is McFrugals's current degree of financial leverage?

    c) Forecast McFrugal's EPS if sales drop to $15 million.

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    Solution Summary

    Solution shows calculation of degree of operating leverage, degree of financial leverage and EPS at different sales levels.