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.)

b. Construct the income statement for the two alternative financing plans. (Input all amounts as positive values. Round EPS to 2 decimal places.) 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.)

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.)