McMichael, Inc has expected sales of $40 million. Fixed operating cost is $5 million, and the variable cost ratio is 65 percent. They have outstanding debt of $10 million at an interest rate of 10 percent and $3million in a 12 percent bond. McMichael has 250,000 shares of preferred stock with a $10 dividend and 1 million shares of outstanding common stock. Their average tax rate is 35% and marginal tax rate is 40%.

A. What is the companys DOL at its current sales level?

B. What is their current DFL?

C. Forecast McMichaels EPS if sales drop to $38 million.

Here is a formula that can help with the Financial leverage:

EBIT/EBIT -I -((Pref. Div. x 1/(1-Tax Rate))