Phelps Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

Sales$6,900,000Less: Variable expense (50% of sales)3,450,000Fixed expense1,990,000Earnings before interest and taxes (EBIT)1,460,000Interest (10% cost)580,000Earnings before taxes (EBT)880,000Tax (35%)308,000Earnings after taxes (EAT)$572,000Shares of common stock390,000EPS$1.47

Phelps Canning Company iscurrently financed with 50 percent debt and 50 percent equity (common stock). To expand facilities, Mr. Phelps estimates a need for $3.9 million in additional financing. His investment dealer has laid out three plans for him to consider:

1. Sell $3.9 million of debt at 9 percent.
2. Sell $3.9 million of common stock at $25 per share.
3. Sell $1.95 million of debt at 8 percent and $1.95 million of common stock at $30 per share.

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,490,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.95 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 pointBefore expansion$After expansion$

b.The DOL before and after expansion. Assume sales of $6.9 million before expansion and $7.9 million after expansion.(Round the final answers to 2 decimal places.)

DOLBefore expansionXAfter expansionX

c-1.The DFL before expansion at sales of $6.9 million.(Round the final answers to 2 decimal places.)

DFLX

c-2.The DFL for all three methods after expansion. Assume sales of $7.9 million.(Round the final answers to 2 decimal places.)

DFL100% DebtX100% EquityX50% Debt & 50% EquityX

d.Compute EPS under all three methods of financing the expansion at $7.9 million in sales (first year) and $10.8 million in sales (last year).(Round the final answers to 2 decimal places.)

EPSFirst yearLast year100% Debt$$100% Equity50% Debt & 50% Equity