Explore BrainMass
Share

Explore BrainMass

    Combined Leverage and its Interpretation

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Albatross Airline's fixed operating costs are $5.8 million, and its variable cost ratio is 0.20. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Albatross has 30,000 shares of preferred stock outstanding, which pays a $2 annual dividend. There are 100,000 shares of common stock outstanding. Revenues for the firm are $8 million, and the firm is in the 40 percent corporate income tax bracket.

    a. Compute Albatross' degree of operating leverage
    b. Compute its degree of financial leverage.
    c. Compute its degree of combined leverage and interpret this value.

    © BrainMass Inc. brainmass.com October 9, 2019, 9:14 pm ad1c9bdddf
    https://brainmass.com/business/finance/178200

    Solution Preview

    Albatross Airline's fixed operating costs are $5.8 million, and its variable cost ratio is 0.20. The firm has $2 million in bonds outstanding with a
    coupon interest rate of 8 percent. Albatross has 30,000 shares of preferred stock outstanding, which pays a $2 annual dividend.
    There are 100,000 shares of common stock outstanding. Revenues for the firm are $8 million, and the firm is in the 40 percent corporate income tax bracket.

    Income Statement
    200X Existing Plan

    Sales $8,000,000

    Less: Variable costs (20%) $1,600,000

    Contribution $6,400,000

    Fixed costs 5,800,000

    Earnings before interest and taxes ...

    Solution Summary

    This discusses the concepts of leverage and its interpretation

    $2.19