McGonnigal, Inc., has expected sales of $40 million. Fixed operating costs are $5 million, and the variable
Question:
McGonnigal, Inc., has expected sales of $40 million. Fixed operating costs are $5 million, and the variable cost ratio is 65 percent. McGonnigal has outstanding a $10 million, 10 percent bank loan and $3 million in 12 percent coupon-rate bonds. McGonnigal has outstanding 250,000 shares of a $10 (dividend) preferred stock and 1 million shares of common stock ($1 par value). McGonnigal’s average tax rate is 35 percent, and its marginal rate is 40 percent.
a. What is McGonnigal’s degree of operating leverage at a sales level of $40 million?
b. What is McGonnigal’s current degree of financial leverage?
c. Forecast McGonnigal’s EPS if sales drop to $38 million.
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow