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 = $80 million VC = Variable Cost = $52 million FC = Fixed Cost = $10 million EBIT = Sales VC FC = $18 million DOL = (Sales VC) / EBIT = 1.56 Explain ??

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

EBIT = $18 million Interest = 10% DFL = EBIT / (EBIT Interest) = 1.80 Explain ?? c. Compute McGrees degree of combined leverage. Explain the result.

DCL = DOL * DFL = 2.80

Explain ??