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Capital Structure, Leverage, and Sales

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
amd $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%

What is McGonnigal's degree of operating leverage at a sales level of $40 million?

EBIT/sales?

What is McGonnigals current degree of financial leverage?

EPS/EBIT?

Forecast McGonnigal's EPS if sales drop to $38 million.

See attached file for full problem description.

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Sales 40 million
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Solution Summary

This solution contains a spreadsheet that calculates the operating leverage, current degree of financial leverage, and forecasts of EPS for McGonnigal company. All steps are shown enclosed in an Excel file.

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