a. Compute the break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars, not in million of dollars.) Break-even point before expansion $3600000 $4600000 Break-even point after expansion b. Compute the degree of operating leverage (DOL) before and after expansion Assume sales of $5 million before expansion and $6 million after expansion (Round the final answer to 2 decimal places.) DOL before expansion 3.57x 4.29 DOL after expansion c. Compute the degree of financial leverage (DFL) before expansion at sales of $5 million and for all three methods of financing after expansion. Assume sales of $6 million for the second part of this question. (Round the final answer to 2 decimal places.) DFL before expansion 14x DFL after expansion 100% Debt DFL after expansion 100% Equity 1.40 x 1.84 x DFL after expansion 50% Debt and Equity d. Compute EPS under all three methods of financing the expansion at $6 million in sales (first year) and $10 million in sales (last year). (Round the final answer to 2 decimal places.) Equity Debt 0.79 Debt and Equity $ 1.05 EPS for the first year 1.10 $ $ EPS for the last year $ e. Select the method for financing the expansion that best suits Mr. Phelps' objective of maximizing shareholders' wealth. Best method for financing before expansion Plan 2 Best method for financing after expansion Plan 1 292 a. Compute the break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars, not in million of dollars.) Break-even point before expansion $3600000 $4600000 Break-even point after expansion b. Compute the degree of operating leverage (DOL) before and after expansion Assume sales of $5 million before expansion and $6 million after expansion (Round the final answer to 2 decimal places.) DOL before expansion 3.57x 4.29 DOL after expansion c. Compute the degree of financial leverage (DFL) before expansion at sales of $5 million and for all three methods of financing after expansion. Assume sales of $6 million for the second part of this question. (Round the final answer to 2 decimal places.) DFL before expansion 14x DFL after expansion 100% Debt DFL after expansion 100% Equity 1.40 x 1.84 x DFL after expansion 50% Debt and Equity d. Compute EPS under all three methods of financing the expansion at $6 million in sales (first year) and $10 million in sales (last year). (Round the final answer to 2 decimal places.) Equity Debt 0.79 Debt and Equity $ 1.05 EPS for the first year 1.10 $ $ EPS for the last year $ e. Select the method for financing the expansion that best suits Mr. Phelps' objective of maximizing shareholders' wealth. Best method for financing before expansion Plan 2 Best method for financing after expansion Plan 1 292 Problem 5-25 Phelps Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales 5,000,000 Less: Variable expense (50% of sales) 2,500,000 Fixed expense 1,800,000 Earnings before interest and taxes (EBIT) 700,000 Interest (10% cost) 200,000 Earnings before taxes (EBT) Tax (34%) 500,000 170,000 Earnings after taxes (EAT) $ 330,000 Shares of common stock 200,000 1.65 EPS $ Phelps Canning Company is currently financed with 50 percent debt and 50 percent equity (common stock). To expand facilities, Mr. Phelps estimates a need for $2 million in additional financing. His investment dealer has laid out three plans for him to consider: 1. Sell $2 million of debt at 13 percent. 2. Sell $2 million of common stock at $20 per share. 3. Sell $1 million of debt at 12 percent and $1 million of common stock at $25 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,300,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 million per year for the next five years. Mr. Phelps is interested in a thorough analysis of his expansion plans and methods of financing. a. Compute the break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars, not in million of dollars.) Break-even point before expansion Break-even point after expansion. b. Compute the degree of operating leverage (DOL) before and after expansion. Assume sales of $5 million before expansion and $6 million after expansion. (Round the final answer to 2 decimal places.). DOL before expansion DOL after expansion hp # a. Compute the break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars, not in million of dollars.) Break-even point before expansion $3600000 $4600000 Break-even point after expansion b. Compute the degree of operating leverage (DOL) before and after expansion Assume sales of $5 million before expansion and $6 million after expansion (Round the final answer to 2 decimal places.) DOL before expansion 3.57x 4.29 DOL after expansion c. Compute the degree of financial leverage (DFL) before expansion at sales of $5 million and for all three methods of financing after expansion. Assume sales of $6 million for the second part of this question. (Round the final answer to 2 decimal places.) DFL before expansion 14x DFL after expansion 100% Debt DFL after expansion 100% Equity 1.40 x 1.84 x DFL after expansion 50% Debt and Equity d. Compute EPS under all three methods of financing the expansion at $6 million in sales (first year) and $10 million in sales (last year). (Round the final answer to 2 decimal places.) Equity Debt 0.79 Debt and Equity $ 1.05 EPS for the first year 1.10 $ $ EPS for the last year $ e. Select the method for financing the expansion that best suits Mr. Phelps' objective of maximizing shareholders' wealth. Best method for financing before expansion Plan 2 Best method for financing after expansion Plan 1 292 a. Compute the break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars, not in million of dollars.) Break-even point before expansion $3600000 $4600000 Break-even point after expansion b. Compute the degree of operating leverage (DOL) before and after expansion Assume sales of $5 million before expansion and $6 million after expansion (Round the final answer to 2 decimal places.) DOL before expansion 3.57x 4.29 DOL after expansion c. Compute the degree of financial leverage (DFL) before expansion at sales of $5 million and for all three methods of financing after expansion. Assume sales of $6 million for the second part of this question. (Round the final answer to 2 decimal places.) DFL before expansion 14x DFL after expansion 100% Debt DFL after expansion 100% Equity 1.40 x 1.84 x DFL after expansion 50% Debt and Equity d. Compute EPS under all three methods of financing the expansion at $6 million in sales (first year) and $10 million in sales (last year). (Round the final answer to 2 decimal places.) Equity Debt 0.79 Debt and Equity $ 1.05 EPS for the first year 1.10 $ $ EPS for the last year $ e. Select the method for financing the expansion that best suits Mr. Phelps' objective of maximizing shareholders' wealth. Best method for financing before expansion Plan 2 Best method for financing after expansion Plan 1 292 Problem 5-25 Phelps Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales 5,000,000 Less: Variable expense (50% of sales) 2,500,000 Fixed expense 1,800,000 Earnings before interest and taxes (EBIT) 700,000 Interest (10% cost) 200,000 Earnings before taxes (EBT) Tax (34%) 500,000 170,000 Earnings after taxes (EAT) $ 330,000 Shares of common stock 200,000 1.65 EPS $ Phelps Canning Company is currently financed with 50 percent debt and 50 percent equity (common stock). To expand facilities, Mr. Phelps estimates a need for $2 million in additional financing. His investment dealer has laid out three plans for him to consider: 1. Sell $2 million of debt at 13 percent. 2. Sell $2 million of common stock at $20 per share. 3. Sell $1 million of debt at 12 percent and $1 million of common stock at $25 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,300,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 million per year for the next five years. Mr. Phelps is interested in a thorough analysis of his expansion plans and methods of financing. a. Compute the break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars, not in million of dollars.) Break-even point before expansion Break-even point after expansion. b. Compute the degree of operating leverage (DOL) before and after expansion. Assume sales of $5 million before expansion and $6 million after expansion. (Round the final answer to 2 decimal places.). DOL before expansion DOL after expansion hp #