DeSoto Tools Inc. is planning to expand production. The expansion will cost $300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at $30 per share. The current income statement before expansion is as follows:

DESOTO TOOLS INC. Income Statement 20X1
Sales.	$	1,500,000
Variable costs		450,000
Fixed costs		550,000
Earnings before interest and taxes	$	500,000
Interest expense		100,000
Earnings before taxes	$	400,000
Taxes @ 34%		136,000
Earnings after taxes	$	264,000
Shares		100,000
Earnings per share	$	2.64

After the expansion, sales are expected to increase by $1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to $800,000. The tax rate is 34 percent.

a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL = (S TVC) / (S TVC FC). For the degree of combined leverage, use the formula: DCL = (S TVC) / (S TVC FC I). These instructions apply throughout this problem.) (Round your answers to 2 decimal places.)

Degree of Operating Leverage_____

Degree of Financial leverage ______

Degree of Combined Leverage_____

b. Construct the income statement for the two alternative financing plans. (Round EPS to 2 decimal places.)

c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion. (Round your answers to 2 decimal places.)

Degree of Operating Leverage Equity__|Debt__

Degree of Financial Leverage Equity___|Debt____

Degree of Combined Leverage Equity___|Debt____