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Note: I want the answers step by step India Tools, Inc., is planning to expand production. The expansion will cost $1,000,000, which can be financed
Note: I want the answers step by step
India Tools, Inc., is planning to expand production. The expansion will cost $1,000,000, which can be financed either by bonds at an interest rate of 12% or by selling 50,000 shares of common stock at $20 per share. The current income statement before expansion is as follows: India Tools, Inc. Income Statement for the Year Ended 2020 Sales .... $5,000,000 Less: Variable costs $ 2,000,000 Fixed costs 500,000 2.500.000 Earnings before interest and taxes 2,500,000 Less: Interest expense 300,000 Earnings before taxes. 2,200,000 Less: Taxes @ 25% 550,000 Earnings after taxes.. $ 1,650,000 Shares.... 100,000 After the expansion, sales are expected to increase by 40%. Variable costs will change proportionally, and fixed costs will increase to $500,000. The tax rate is 34 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. b. Construct the income statement for the two alternative financing plans. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion. d. Explain which financing plan you favor and the risks involved with each plan. cStep by Step Solution
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