DeSoto Tools Inc. is planning to expand production. The expansion will cost $4,400,000, which can be financed either by bonds at an interest rate of 6 percent or by selling 88,000 shares of common stock at $50 per share. The current income statement before expansion is as follows:

DeSoto Tools Inc. Income Statement 201X
Sales.	$	3,260,000
Variable costs		1,304,000
Fixed costs		824,000
Earnings before interest and taxes	$	1,132,000
Interest expense		640,000
Earnings before taxes	$	492,000
Taxes (@ 40%)		196,800
Earnings after taxes	$	295,200
Shares		340,000
Earnings per share	$	.87

After the expansion, sales are expected to increase by $1,740,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase to $1,398,000. The tax rate is 40 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. (Input all amounts as positive values. Round EPS to 2 decimal places.)

	Debt		Equity
(Click to select)InterestEarnings before interest and taxesSalesFixed costsVariable costs	$		$
(Click to select)SalesVariable costsEarnings before taxesTaxesInterest
(Click to select)TaxesSalesEarnings after taxesEarnings before taxesFixed costs
(Click to select)Earnings after taxesEarnings before interest and taxesSalesEarnings before taxesFixed costs	$		$
(Click to select)Earnings after taxesEarnings before taxesSalesInterestTaxes
(Click to select)SalesEarnings before interest and taxesEarnings before taxesVariable costsEarnings after taxes	$		$
(Click to select)Earnings before interest and taxesFixed costsEarnings after taxesInterestTaxes
(Click to select)Earnings after taxesTaxesFixed costsInterestEarnings before taxes	$		$
Common shares
Earnings per share	$		$

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.)

	Debt	Equity
Degree of operating leverage
Degree of financial leverage
Degree of combined leverage