Computation of degree of combined leverage

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Reference no: EM1310753

Computation of Degree of operating leverage, financial leverage & combined leverage and EPS if sales level declined.

Fastron, Inc. expects sales of silicon chips to be 60 mil this year. Because this is a very capital intensive business, fixed operating costs are 20 mil. The variable cost ratio is 40 percent. The firm's debt obligations consist of a $4 mil, 10 percent bank loan and a 20 mil bond issue with an 11 percent coupon rate. Fastron has 1 mil shares of common stock outstanding, and its marginal tax rate is 40 percent.

1. Compute Fastron's degree of operating leverage.

2. Compute Fastron's degree of financial leverage.

3. Compute Fastron's degree of combined leverage.

4. Compute Fastron's EPS if sales decline by 5 percent.

Reference no: EM1310753

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