Phelps Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales Less: Variable expense (50% of sales) Fixed expense $5,700,000 2,850,000 1,870,000 Earnings before interest and taxes (EBIT) Interest (10% cost) 980,000 340,000 Earnings before taxes (EBT) Tax (35%) 640,000 224,000 Earnings after taxes (EAT) $416,000 Shares of common stock EPS 270,000 $1.54 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 $2.7 million in additional financing. His investment dealer has laid out three plans for him to consider: 1. Sell $2.7 million of debt at 9 percent. 2. Sell $2.7 million of common stock at $25 per share. 3. Sell $1.35 million of debt at 8 percent and $1.35 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 $2,370,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $135 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: 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 $2.7 million in additional financing. His investment dealer has laid out three plans for him to consider: 1. Sell $2.7 million of debt at 9 percent. 2. Sell $2.7 million of common stock at $25 per share. 3. Sell $1.35 million of debt at 8 percent and $1.35 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 $2,370,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.35 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 $5.7 million before expansion and $6.7 million after expansion. (Round the final answers to 2 decimal places.) Before expansion After expansion DOL 2.91 x 3.42