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DeSoto Tools Inc. is planning to expand production. The expansion will cost $ 3 0 0 , 0 0 0 , which can be financed
DeSoto Tools Inc. is planning to expand production. The expansion will cost $ which can be financed either by bonds at an interest rate of percent or by selling shares of common stock at $ per share.The current income statement before expansion is as follows:DESOTO TOOLS, INC.Income StatementXSalesLess: Variable costs$$Fixed costsEarnings before interest and taxesLess: Interest expenseEarnings before taxes$ Less: Taxes & Earnings after taxes$ Shares Earnings per share$After the expansion, sales are expected to increase by $ Variable costs will remain at percent of sales, and fixed costs will increase to $ The tax rate is percent. 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 developed in footnote ; for the degree of combined leverage. use the formula developed in footnote These instructions apply throughout this problem. Construct the income statement for the two alternative financing plans. Calculate the degree of operating leverage, the degree of financial leverage. and the degree of combined leverage, after expansion. Explain which financing plan you favor and the risks involved with each plan.
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