DELSING CANNING COMPANY IS CONSIDERING AN EXPANSION OF ITS FACILITIES. ITS CURRENT INCOME STATEMENT IS AS FOLLOWS:

SALES............................................................................ 7,100,100 VARIABLE COSTS (50% OF SALES).............................3,550,000 FIXED COSTS.................................................................2,010,000 EBIT.................................................................................1,540,000 INTEREST (10% COST)....................................................620,000 EBT.....................................................................................920,000 TAX (30%)..........................................................................276,000 EAT.....................................................................................644,000 SHARES COMMON STOCK..............................................410,000 EPS...........................................................................................1.57

The company is currently financed with 50% debt and 50% equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $4.1 million in additional financing. His investment banker has laid out three plans for him to consider: 1) Sell $4.1 million of debt at 11% 2) Sell $4.1 million of common stock at $20 per share 3) Sell $2.05 million of debt at 10% and $2.05 million of common stock at $25 per share.

Variable costs are expected to stay at 50% of sales, while fixed expenses will increase to $2,510,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates sales will rise by $2.05 million per year for the next 5 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 $7.1 million before expansion, and $8.1 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. The degree of financial leverage before expansion. ROUND YOUR ANSWERS TO 2 DECIMAL PLACES.

d. The degree of financial leverage for all three methods after expansion. Assume sales of $8.1 million for this question. ROUND YOUR ANSWERS TO 2 DECIMAL PLACES.

	DEGREE OF FINANCIAL LEVERAGE
100 % DEBT
100% EQUITY
50% DEBT & 50% EQUITY

e. Compute EPS under all three methods of financing the expansion at $8.1 million in sales (first year) and $11.0 million in sales (last year). ROUND ANSWERS TO 2 DECIMAL PLACES.

	EPS
	FIRST YEAR	LAST YEAR
100% DEBT
100% EQUITY
50% DEBT & 50% EQUITY