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DeSoto Tools Inc. is planning to expand production. The expansion will cost $2,600,000, which can be financed either by bonds at an Interest rate of
DeSoto Tools Inc. is planning to expand production. The expansion will cost $2,600,000, which can be financed either by bonds at an Interest rate of 7 percent or by selling 52,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: DESOTO TOOLS INC. Income Statement 20x1 Sales Variable costs Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes e 405 Earnings after taxes Shares Earnings per share $3,060,000 1.224.000 806.000 $1,030,000 460,000 $ 570,000 228,000 342,000 160,000 2.14 After the expansion, sales are expected to increase by $1,560,000. Variable costs will remain pt 40 percent of sales, and fixed costs will increase to $1,362,000. 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 -1. 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. (Round EPS to 2 decimal places.) Debt Equity 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
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