DeSoto Tools Inc. is planning to expand production. The expansion will cost $4,200,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 84,000 shares of common stock at $50 per share. The current income statement before expansion is as follows:

DeSoto Tools Inc. Income Statement 201X
Sales.	$	3,240,000
Variable costs		648,000
Fixed costs		822,000
Earnings before interest and taxes	$	1,770,000
Interest expense		620,000
Earnings before taxes	$	1,150,000
Taxes (@ 30%)		345,000
Earnings after taxes	$	805,000
Shares		320,000
Earnings per share	$	2.52

After the expansion, sales are expected to increase by $1,720,000. Variable costs will remain at 20 percent of sales, and fixed costs will increase to $1,394,000. The tax rate is 30 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)Earnings before interest and taxesFixed costsInterestSalesVariable costs	$		$
(Click to select)TaxesEarnings before taxesSalesVariable costsInterest
(Click to select)Earnings before taxesEarnings after taxesTaxesFixed costsSales
(Click to select)Earnings before interest and taxesFixed costsEarnings after taxesSalesEarnings before taxes	$		$
(Click to select)Earnings after taxesTaxesInterestEarnings before taxesSales
(Click to select)SalesEarnings before interest and taxesEarnings before taxesEarnings after taxesVariable costs	$		$
(Click to select)InterestFixed costsTaxesEarnings before interest and taxesEarnings after taxes
(Click to select)InterestEarnings before taxesEarnings after taxesTaxesFixed costs	$		$
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