McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65. The firm has a $20 million, 10 percent bank loan and a $6 million, 12 percent bond issue outstanding. The firm has 1 million shares of $5 (dividend) preferred stock and 2 million shares of common stock ($1 par). McGee’s marginal tax rate is 40 percent. Sales are expected to be $80 million.

a. Compute McGee’s degree of operating leverage at an $80 million sales level.

b. Compute McGee’s degree of financial leverage at an $80 million sales level.

c. If sales decline to $76 million, forecast McGee’s earnings per share. P-9687