Question
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: The company is currently financed with 50 percent
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
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 $2.3 million in additional financing. His investment banker has laid out three plans for him to consider:
- Sell $2.3 million of debt at 11 percent.
- Sell $2.3 million of common stock at $25 per share.
- Sell $1.15 million of debt at 10 percent and $1.15 million of common stock at $40 per share.
Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,330,000 per year. Delsing 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.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.)
b.The degree of operating leverage before and after expansion. Assume sales of $5.3 million before expansion and $6.3 million after expansion. Use the formula: DOL = (STVC) / (STVC FC).(Round your answers to 2 decimal places.)
c-1.The degree of financial leverage before expansion.(Round your answer to 2 decimal places.)
c-2.The degree of financial leverage for all three methods after expansion. Assume sales of $6.3 million for this question.(Round your answers to 2 decimal places.)
d.Compute EPS under all three methods of financing the expansion at $6.3 million in sales (first year) and $10.3 million in sales (last year).(Round your answers to 2 decimal places.)
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