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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 (sex 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 (sex of sales) Fixed expense $5,500,000 2,750,000 1,850,000 Earnings before interest and taxes (EBIT) Interest (109 cost 900,000 300,000 Earnings before taxes (EBT) Tax (489) 600,000 240,000 Earnings after taxes (EAT) $360,000 Shares of common stock EPS 250,000 $1.44 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 $2.5 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 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 point $ Before expansion After expansion 5 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.) DOL X Before expansion After expansion X

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