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Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales $ 5,800,000 Variable costs (50% of sales)

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

Sales $ 5,800,000
Variable costs (50% of sales) 2,900,000
Fixed costs 1,880,000
Earnings before interest and taxes (EBIT) $ 1,020,000
Interest (10% cost) 360,000
Earnings before taxes (EBT) $ 660,000
Tax (40%) 264,000
Earnings after taxes (EAT) $ 396,000
Shares of common stock 280,000
Earnings per share $ 1.41

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 $2.8 million in additional financing. His investment banker has laid out three plans for him to consider:

  1. Sell $2.8 million of debt at 10 percent.
  2. Sell $2.8 million of common stock at $20 per share.
  3. Sell $1.40 million of debt at 9 percent and $1.40 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 $2,380,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.40 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.)

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b. The degree of operating leverage before and after expansion. Assume sales of $5.8 million before expansion and $6.8 million after expansion. Use the formula: DOL = (S TVC) / (S TVC FC). (Round your answers to 2 decimal places.)

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

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $6.8 million for this question. (Round your answers to 2 decimal places.) image text in transcribed

d. Compute EPS under all three methods of financing the expansion at $6.8 million in sales (first year) and $10.8 million in sales (last year). (Round your answers to 2 decimal places.) image text in transcribed

Break-Even Point Before expansion After expansion Degree of Operating Leverage Before expansion After expansion Degree of Financial Leverage 100% Debt 100% Equity 50% Debt & 50% Equity Earnings per Share First Year Last Year 100% Debt 100% Equity 50% Debt & 50% Equity

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