McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65 (Variable cost / Sales). The firm has a $30 million, 10 percent bank loan. McGees marginal tax rate is 40 percent. Sales are expected to be $80 million.

a. Compute McGees degree of operating leverage at an $80 million sales level. Explain the result.

Sales = ?? VC = Variable Cost = ?? FC = Fixed Cost = ?? EBIT = Sales VC FC = ?? DOL = (Sales VC) / EBIT = ?? Explain ??

b. Compute McGees degree of financial leverage at an $80 million sales level. Explain the result.

EBIT = ?? Interest = ?? DFL = EBIT / (EBIT Interest) = ?? Explain ?? c. Compute MCGrees degree of combined leverage. Explain the result.

DCL = DOL * DFL = ??

Explain ??

d. If sales decline to $76 million, forecast McGees earnings per share.

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