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    Capital Structure, Leverage, and Sales

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    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.

    © BrainMass Inc. brainmass.com June 3, 2020, 7:56 pm ad1c9bdddf
    https://brainmass.com/business/finance/capital-structure-leverage-and-sales-117251

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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.

    $2.19

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