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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
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 SOTO TOOLS I Income Statement Sales Variable costs Fixed costs $ 1,500,000 450,000 550,000 Eanings before interest and taxes Interest expense $ 500,000 100,000 Earnings before taxes Taxes @ 34% $ 400,000 136,000 Earmings after taxes $ 264,000 Shares Earnings per share 100,000 $ 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
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