Problem:
McFrugal Inc. has expected sales of $20 million. Fixed operating costs are $2.5 million, and the variable cost ratio is 65 percent. McFrugal has outstanding a $12 million, 8 percent bank loan. The firm also has outstanding 1 million shares of common stock ($1 par value). McFrugal's tax rate is 40 percent.
Q1. What is McFrugal's degree of operating leverage at a sales level of $20 million?
Q2. What is McFrugals's current degree of financial leverage?
Q3. Forecast McFrugal's EPS if sales drop to $15 million.