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DeSoto Tools Incorporated is planning to expand production. The expansion will cost $2,400,000, which can be financed either by bonds at an interest rate
DeSoto Tools Incorporated is planning to expand production. The expansion will cost $2,400,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 48,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: Sales Variable costs Fixed costs DESOTO TOOLS INCORPORATED Income Statement 20x1 $ 3,040,000 608,000 804,000 Earnings before interest and taxes Interest expense Earnings before taxes Taxes @30% Earnings after taxes Shares Earnings per share $ 1,628,000 440,000 $ 1,188,000 356,400 $ 831,600 140,000 $ 5.94 After the expansion, sales are expected to increase by $1,540,000. Variable costs will remain at 20 percent of sales, and fixed costs will increase to $1,358,000. 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.) Note: Round your answers to 2 decimal places. Degree of operating leverage Degree of financial leverage Degree of combined leverage < Prev 5 of 8 Next > b. Construct the income statement for the two alternative financing plans. Note: Round EPS to 2 decimal places. Enter your answers as positive values. Common shares Earnings per share Debt Equity c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion. Note: Round your answers to 2 decimal places. Degree of operating leverage Degree of financial leverage Degree of combined leverage Debt Equity < Prev 5 of 8 Next
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