Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

Sales$6,000,000

Variable costs (50% of sales) 3,000,000

Fixed costs 1,900,000

Earnings before interest and taxes (EBIT)$1,100,000

Interest (10% cost) 400,000

Earnings before taxes (EBT)$700,000

Tax (35%) 245,000

Earnings after taxes (EAT)$455,000

Shares of common stock 300,000

Earnings per share$1.52

The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $3.0 million in additional financing. His investment banker has laid out three plans for him to consider:

1.Sell $3.0 million of debt at 12 percent.

2.Sell $3.0 million of common stock at $20 per share.

3.Sell $1.50 million of debt at 11 percent and $1.50 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 $2,400,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.50 million per year for the next five years.

Delsing is interested in a thorough analysis of his expansion plans and methods of financing.He would like you to analyze the following:

a.	The break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars not in millions, i.e, $1,234,567.)

	Break-Even Point
Before expansion	$
After expansion	$

b.	The degree of operating leverage before and after expansion. Assume sales of $6.0 million before expansion and $7.0 million after expansion. Use the formula: DOL = (S TVC) / (S TVC FC).(Round your answers to 2 decimal places.)

	Degree of Operating Leverage
Before expansion
After expansion

c-1.	The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)

Degree of financial leverage

c-2.	The degree of financial leverage for all three methods after expansion. Assume sales of $7.0 million for this question. (Round your answers to 2 decimal places.)

	Degree of Financial Leverage
100% Debt
100% Equity
50% Debt & 50% Equity

d.	Compute EPS under all three methods of financing the expansion at $7.0 million in sales (first year) and $11.0 million in sales (last year).(Round your answers to 2 decimal places.)

	Earnings per share
	First year	Last year
100% Debt	$	$
100% Equity
50% Debt & 50% Equity