Kermit's Hardware's (KH) Fixed Operating Costs Are $20

Multiple Choice

Kermit's Hardware's (KH) fixed operating costs are $20.8 million, and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million, and its marginal tax rate is 40%. Compute KH's degree of combined leverage.

A) 26.8
B) 5.5
C) 29.1
D) 4.7