Compute operating and financial leverage

Reference no: EM1361832

Illinois Tool Company's fixed operating costs are $1,260,000 and its variable cost ratio (ie variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million.

1. What is ITC's degree of operating leverage at a sales level of $9 million? Verbally explain what this means.
2. What is ITC's degree of financial leverage at an EBIT level of $1,440,000? Verbally explain what this means.
3. What is ITC's degree of combined leverage at a sales level of $10 million? Verbally explain what this means.

Reference no: EM1361832

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