DeSoto Tools Incorporated is planning to expand production. The expansion will cost $2,300,000, which can be financed either by bonds at an interest rate of 10 percent or by selling 46,000 shares of common stock at $50 per share. The current income statement before expansion is as follows:

DESOTO TOOLS INCORPORATED

Income Statement 20X1

Sales $ 3,030,000

Variable costs 1,212,000

Fixed costs 803,000

Earnings before interest and taxes $ 1,015,000

Interest expense 430,000

Earnings before taxes $ 585,000

Taxes @ 40% 234,000

Earnings after taxes $ 351,000

Shares 130,000

Earnings per share $ 2.70

After the expansion, sales are expected to increase by $1,530,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase to $1,356,000. 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 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

B.) Construct the income statement for the two alternative financing plans. Note: Round EPS to 2 decimal places. Enter your answers as positive values.

	debt	equity
earnings after taxes
earnings before interest and taxes
earnings before taxes
fixed costs
interest
sales
taxes
variable cost
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. Note: Round your answers to 2 decimal places.

	Debt	Equity
Degree of Operating Leverage
Degree of Financial Leverage
Degree of Combined Leverage