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Phelps Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales Less: Variable expense (508 of sales) Fixed

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Phelps Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales Less: Variable expense (508 of sales) Fixed expense $6,200,000 3,100,000 1,920,000 Earnings before interest and taxes (EBIT) Interest (101 cost) 1,180,000 440,000 Earnings before taxes (EBT) Tax (308) 740,000 222,000 Earnings after taxes (EAT) $518,000 Shares of common stock EPS 320,000 $1.62 Phelps Canning Company is currently financed with 50 percent debt and 50 percent equity (common stock). To expand facilities, Mr. Phelps estimates a need for $3.2 million in additional financing. His investment dealer has laid out three plans for him to consider: 1. Sell $3.2 million of debt at 14 percent. 2. Sell $3.2 million of common stock at $20 per share. 3. Sell $1.60 million of debt at 13 percent and $1.60 million of common stock at $25 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,420,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.60 million per year for the next five years. Mr. Phelps is interested in a thorough analysis of his expansion plans and methods of financing. He would like you to analyze the following: a. The break-even point for operating expenses before and after expansion (in sales dollars). (Enter the answers in dollars not in millions.) Break-even point Before expansion After expansion b. The DOL before and after expansion. Assume sales of $6.2 million before expansion and $7.2 million after expansion (Round the final answers to 2 decimal places.) Before expansion After expansion c-1. The DFL before expansion at sales of $6.2 million (Round the final answers to 2 decimal places.) DFLUX c-2. The DFL for all three methods after expansion. Assume sales of $7.2 million. (Round the final answers to 2 decimal places.) 1008 Debt 1000 Equity 508 Debt . 508 Equity d. Compute EPS under all three methods of financing the expansion at $7.2 million in sales (first year) and $10,1 million in sales (last year). (Round the final answers to 2 decimal places.) EPS 100 Debt 1001 Equity 50 Debt. 501 Equity

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