Connely, Inc., expects sales of silicon chips to be $30 million this year. Because this is a

Question:

Connely, Inc., expects sales of silicon chips to be $30 million this year. Because this is a very capital-intensive business, fixed operating costs are $10 million. The variable cost ratio is 40 percent. The firm’s debt obligations consist of a $2 million, 10 percent bank loan and a $10 million bond issue with a 12 percent coupon rate. The firm has 100,000 shares of preferred stock outstanding that pays a $9.60 dividend. Connely has

1 million shares of common stock outstanding and its marginal tax rate is 40 percent.

a. Compute Connely’s degree of operating leverage.

b. Compute Connely’s degree of financial leverage.

c. Compute Connely’s degree of combined leverage.

d. Compute Connely’s EPS if sales decline by 5 percent.

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