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

Sales$5,500,000Less: Variable expense (50% of sales)2,750,000Fixed expense1,850,000Earnings before interest and taxes (EBIT)900,000Interest (10% cost)300,000Earnings before taxes (EBT)600,000Tax (40%)240,000Earnings after taxes (EAT)$360,000Shares of common stock250,000EPS$1.44

Phelps Canning Company iscurrently financed with 50 percent debt and 50 percent equity (common stock). To expand facilities, Mr. Phelps estimates a need for $2.5 million in additional financing. His investment dealer has laid out three plans for him to consider:

1. Sell $2.5 million of debt at 13 percent.
2. Sell $2.5 million of common stock at $20 per share.
3. Sell $1.25 million of debt at 12 percent and $1.25 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 $2,350,000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.25 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 $5.5 million before expansion and $6.5 million after expansion.(Round the final answers to 2 decimal places.)

DOLBefore expansionXAfter expansionX

c-1.The DFL before expansion at sales of $5.5 million.(Round the final answers to 2 decimal places.)

DFLX

c-2.The DFL for all three methods after expansion. Assume sales of $6.5 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 $6.5 million in sales (first year) and $10.5 million in sales (last year).(Round the final answers to 2 decimal places.)

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

e.Not available in Connect.