McGonnigal Inc. has expected sales of $40 million. Fixed operating costs are $4 million, and the variable cost ratio is 65 percent. McGonnigal has outstanding a $6 million, 11 percent bank loan and $3 million in 14 percent coupon-rate bonds. McGonnigal has outstanding 200,000 shares of a $9 (dividend) preferred stock and 1 million shares of common stock ($1 par value). McGonnigals average tax rate is 35 percent, and its marginal rate is 40 percent. Assume that the average rate does not change with a change in sales and EBIT.

1. What is McGonnigals degree of operating leverage at a sales level of $40 million? Round your answer to three decimal places.

2. What is McGonnigals current degree of financial leverage? Round your answer to three decimal places.

3. Forecast McGonnigals EPS if sales drop to $38.8 million. Round your answer to the nearest cent.

   $