DeSoto Tools Inc. is planning to expand production. The expansion will cost $2,700,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 54,000 shares of common stock at $50 per share. The current income statement before expansion is as follows:

After the expansion, sales are expected to increase by $1,570,000. Variable costs will remain at 20 percent of sales, and fixed costs will increase to $1,364,000. 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.)

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.)

DeSoto Tools Inc Income Statement 20X1 Sales Variable costs Fixed costs Eamings before interest and taxes Interest expense Eamings before taxes Taxes @ 30% Eamings after taxes Shares Eamings per share $3,070,000 614,000 807,000 $1,649,000 470,000 $1,179,000 $ 825,300 170,000 $485