McFrugal, Inc. – Leverage and EPS
operating costs are $2.5 million, and the variable cost ratio is 65 percent.
McFrugal has outstanding a $12 million, 8 percent bank loan. The firm also has
outstanding 1 million shares of common stock ($1 par value). McFrugal’s tax
rate is 40 percent.
a. What is McFrugal’s degree of operating leverage at a
sales level of $20 million?
b. What is McFrugal’s current degree of financial leverage?
c. Forecast McFrugal’s EPS if sales drop to $15 million.
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