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

Sales	$	7,400,000
Variable costs (50% of sales)		3,700,000
Fixed costs		2,040,000
Earnings before interest and taxes (EBIT)	$	1,660,000
Interest (10% cost)		680,000
Earnings before taxes (EBT)	$	980,000
Tax (30%)		294,000
Earnings after taxes (EAT)	$	686,000
Shares of common stock		440,000
Earnings per share	$	1.56

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 $4.4 million in additional financing. His investment banker has laid out three plans for him to consider:

Sell $4.4 million of debt at 14 percent.

Sell $4.4 million of common stock at $20 per share.

Sell $2.20 million of debt at 13 percent and $2.20 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 $2,540,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.20 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: $ 4,080,000

After Expansion: $5,080,000

b. The degree of operating leverage before and after expansion. Assume sales of $7.4 million before expansion and $8.4 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 : 2.23

After Expansion: 2.53

c-1. The degree of financial leverage before expansion. (Round your answers to 2 decimal places.) Degree of financial leverage: 1.69

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.4 million for this question. (Round your answers to 2 decimal places.) Degree of Financial Leverage

100% Debt : _____

100% Equity : 1.69

50% Debt & 50% Equity : ______

d. Compute EPS under all three methods of financing the expansion at $8.4 million in sales (first year) and $10.2 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: _______