Question: Albatross Airline’s fixed operating costs are 5.8 mil, and its variable cost ratio is 0.20. The firm has 2 mil in bonds outstanding with a coupon interest rate of 8 percent. Albatross has 30,000 shares of preferred stock outstanding, which pays a 2 dollar yearly dividend. There are 100,000 shares of common stock outstanding. Revenue for the firm is 8 mil, and the firm is in the forty percent corporate income tax bracket.
[A] Calculate its degree of financial leverage.
[B] Calculate Albatross’ degree of operating leverage.
[C] Calculate its degree of combined leverage and interpret this value.