Calculation of various leverage
McFrugal, Inc. has expected sales of $20 million. Fixed operating costs are $2.5 million, and the variable cost ratio is 65%. McFrugal has outstanding a $12 million, 8% bank loan. The firm also has outstanding 1 million shares of common stock ($1 par value). McFrugal's tax rate is 40%.
a) What is McFrugal's degree of operating leverage at a sales level of $20 million?
b) What is McFrugal's current degree of financial leverage?
c) Forecast McFrugal's EPS if sales drop to 15 million.