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    Degree of total leverage

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    Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million and its marginal tax rate is 40%. Compute KH's degree of total leverage.

    a. 26.8
    b. 5.5
    c. 29.1
    d. 4.7

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    Solution Preview

    Degree of total leverage = Contribution Margin / (operating profits - Interest)
    Revenues = 32.2 ...

    Solution Summary

    Explains how to calculate the degree of total leverage when operating fixed costs, variable cost ratio, revenues, debt, no. of shares outstanding, coupon interest rate and tax rate is given.