Actual (1 ) XYZ CORP sales are $5,000,000 (1 million units at $5 each). Its operating variable costs are 50% of its sales level and its fixed operating costs are $1,500,000. Additionally, it has annual interest charges of 10% from a total Debt of $2,000,000. The firm also has 200,000 shares of common stock outstanding and is subject to a 21% tax rate. The firm is currently financed with 50% debt and 50% equity (common stock at par value of $10)

Now, XYZ corp is considering an expansion of its facilities. To do so, they need $2,000,000 in additional financing. The firm has 3 plans to consider:

Plan 2: Sell $2million of new debt at 10% interest. It is expected that variable operating costs will decrease to 40% of its sales, and fixed operating costs will increase to $1.8 million.

Plan 3: Sell $2million of new common stock at $20 per share. It is expected that variable operating costs will decrease to 40% of its sales, and fixed operating costs will increase to $1.8 million.

Plan 4: Sell $1 million of new debt at a 10% interest and $1 million of new common stock at $20 per share. Variable operating costs will decrease to 40% of itssales, and fixed operating costs will increase to $1.8 million.

****Using the data provided in this Income Statement, which will be the break-even point in units of Part 1,2,3, and 4. Explain.*****

INCOME STATEMENTS 2 3 Sales Operating variable costs Gross profit $5,000,000 $8,000,000 $8,000,000 $8,000,000 2,500,000 3,200,000 3,200,000 3,200,000 2,500,000 4,800,000 4,800,000 4,800,000 Fixed operating costs Operating income 1,500,000 1,000,000 1,800,000 3,000,000 1,800,000 3,000,000 1,800,000 3,000,000 Earnings before interest and taxes (EBIT) 1,000,000 3,000,000 3,000,000 3,000,000 Interest expense (200,000) (400,000) (200,000) (300,000) Earnings before taxes (EBT) 800,000 2,600,000 2,800,000 2,700,000 Income tax expense - 21% 168,000 546,000 588,000 567,000 Net income $ 632,000 $2,054,000 $2,212,000 $2,133,000 Earnings per share (EPS) = $ 3.16 $ 10.27 $ 7.37 $ 8.53 Number common shares used in per share calculations 200,000 200,000 300,000 250,000 INCOME STATEMENTS 2 3 Sales Operating variable costs Gross profit $5,000,000 $8,000,000 $8,000,000 $8,000,000 2,500,000 3,200,000 3,200,000 3,200,000 2,500,000 4,800,000 4,800,000 4,800,000 Fixed operating costs Operating income 1,500,000 1,000,000 1,800,000 3,000,000 1,800,000 3,000,000 1,800,000 3,000,000 Earnings before interest and taxes (EBIT) 1,000,000 3,000,000 3,000,000 3,000,000 Interest expense (200,000) (400,000) (200,000) (300,000) Earnings before taxes (EBT) 800,000 2,600,000 2,800,000 2,700,000 Income tax expense - 21% 168,000 546,000 588,000 567,000 Net income $ 632,000 $2,054,000 $2,212,000 $2,133,000 Earnings per share (EPS) = $ 3.16 $ 10.27 $ 7.37 $ 8.53 Number common shares used in per share calculations 200,000 200,000 300,000 250,000