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 Earnings before interest and taxes (EBIT) Interest (10% cost) $5,200,000 2,600,000 1,820,000 780,000 240.000 Earnings before taxes (EBT) Tax (40%) 540,000 216,000 Earnings after taxes (EAT) $324,000 Shares of common stock EPS 220,000 $1.47 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 $2.2 million in additional financing. His Investment dealer has laid out three plans for him to consider 1. Sell $2.2 million of debt at 10 percent. 2. Sell $2.2 million of common stock at $20 per share. 3. Sell $1.10 million of debt at 9 percent and $1.10 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 $2.320.000 per year. Mr. Phelps is not sure how much this expansion will add to sales, but he estimates that sales will rise by $110 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: 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 $3.2 million before expansion and $6.2 million after expansion (Round the final answers to 2 decimal places.) DOL X Before expansion After expansion X c-1. The DFL before expansion at sales of $5.2 million. (Round the final answers to 2 decimal places.) DFL X c-2. The DFL for all three methods after expansion. Assume sales of $6.2 million (Round the final answers to 2 decimal places.) DEL 100 Debt 100% Equity sox Debt & 50% Equity d. Compute EPS under all three methods of financing the expansion at $6.2 million in sales (first year) and $10.2 million in sales (last year). (Round the final answers to 2 decimal places.) After expansion c-1. The DFL before expansion at sales of $5.2 million. (Round the final answers to 2 decimal places.) DFL X c-2. The DFL for all three methods after expansion. Assume sales of $6.2 million. (Round the final answers to 2 decimal places.) DEL 100% Debt 100% Equity 50X Debt & Sex Equity d. Compute EPS under all three methods of financing the expansion at $6.2 million in sales (first year) and $10.2 million in sales (last year). (Round the final answers to 2 decimal places.) First year $ Last year $ EPS 100% Debt 100x Equity 50% Debt & Sex Equity
