Hewitt Software sales for the year 2006 were RM5 million. The firms variable operating cost was 0.50 and fixed costs RM900,000. Its marginal income tax rate is 40 percent. Currently, the firm has RM2.4 million of long-term bank loan outstanding at an average interest rate of 12.5 percent. The remainder of the firms capital structure consists of RM60,000 preferred stock dividends.

Hewitt is forecasting a 10 percent increase in sales for next year (2007). Furthermore, the firm is planning to purchase additional labor-saving equipment, which will increase fixed costs by RM50,000 and reduce the variable costs ratio to 0.475. Financing this equipment with debt will require additional bank loans of RM500,000 at an interest rate of 12.5 percent and preferred dividends will remain unchanged. Calculate Hewitts expected degree of combined leverage for 2007.