Albatross Airline’s fixed operating costs are $5.8 million, and its variable cost ratio is 0.20. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Albatross has 30,000 shares of preferred stock outstanding, which pays a $2.00 annual dividend. There are 100,000 shares of common stock outstanding.

Revenues for the firm are $8 million, and the firm is in the 40 percent corporate income tax bracket. Compute the following for the firm: P-9687

•a. Degree of operating leverage

•b. Degree of financial leverage

c. Degree of combined leverage and interpret this value