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Fastron, Inc.

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Fastron, Inc. expects sales of silicon chips to be $60 million this year. Because this is a very capital-intensive business, fixed operating costs are $20 million. The variable cost ratio is 40 percent. The firm's debt obligations consist of a $4 million, 10 percent bank loan and a $20 million bond issue with an 11 percent coupon rate. Fastron has 1 million shares of common stock outstanding, and its marginal tax rate is 40 percent.

a. Compute Fastron's degree of operating leverage.
b. Compute Fastron's degree of financial leverage.
c. Compute Fastron's degree of combined levearage.
d. Compute Fastron's EPS if sales decline by 5 percent.

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Solution Summary

This solution is comprised of a detailed answer by computing Fastron's degree of operating leverage, Fastron's degree of financial leverage, Fastron's degree of combined levearage, and Fastron's EPS if sales decline by 5 percent.

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Fastron, Inc. expects sales of silicon chips to be $60 million this year. Because this is a very capital-intensive business, fixed operating costs are $20 million. The variable cost ratio is 40 percent. The firm's debt obligations consist of a $4 million, 10 percent bank loan and a $20 million bond issue with an 11 percent coupon rate. Fastron has 1 million shares of common stock outstanding, and its ...

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