"Plastics R Us" Manufacturing Company Ltd, a company that manufactures disposable cups, boxes, bags and containers is planning to invest in new machinery costing $3 million.The revenues and costs arising from this investment are shown below:

$'000

Sales 2,700

Variable Cost of Sales 756

Other Fixed Operating Expenses including tax-allowable depreciation 851

Plastic R Us is considering financing the machinery exclusively by an issue of 8% bonds redeemable in 5 years time with a nominal value of $1,000.

Plastics R Us has shared its budgeted profit and loss statement for the year ended 30^th November 2018, as well as its budgeted statement of financial position as at 30^th November 2018 below.These statements DO NOT take into consideration the effects of the machinery purchase or the financing option.

"Plastics R US" Manufacturing Company Ltd

Profit and Loss Statement for the year ended 30^th November 2018

20X8

$000

Sales 21,000

Cost of Sales (100% variable costs) 12,500

Gross Profit 8,500

Other Operating Expenses (100% fixed costs 3,720

Earnings Before Interest and Taxes (EBIT) 4,780

Interest 1,000

Earnings Before Tax 3,780

Tax 1,134

Earnings Available to Common Shareholders (EACS) 2,646

Dividends 1,323

Retained Earnings 1,323

Important information about "Plastics R US" costs:

-Cost of Sales comprises ONLY variable costs

-The corporation tax rate is 30%

-Dividend cover is 2:1

"Plastics R US" Manufacturing Company Ltd

Statement of Financial Position as at 30^th November 2018

2018

$000

Non-current assets 33,000

Current assets 13,000

TOTAL ASSETS 46,000

Equity, Share capital and Reserves 32,000

10% bonds 20X9 10,000

Current Liabilities 4,000

Total Liabilities 14,000

TOTAL EQUITY AND LIABILITIES 46,000

Using the data above complete the following:

a)Prepare the Profit and Loss Statement and a Statement of Financial Position for "Plastics R Us" to illustrate the effect of the additional $12 million investment.(Note: The additional $12 million investment will result in an increase in sales, operating expenses, financial expenses, assets, and liabilities and will also impact Gross Profit, E ). (10 marks)

b)Calculate the firm's Degree of Leverage (DOL, DFL and DTL) when sales were $21,000,000 (4 marks)

c) Using the DOL, DFL, and DTL, in part b, predict the impact of the investment on the firm's EBIT and EACS.

d) Discuss whether changing Capital Structure of the firm can lead to a reduction in it cost of capital and hence an increase in the value of the company. (i.e increasing the proportion of debt relative to equity)

Question 1 \"Plastics R Us\" Manufacturing Company Ltd, a company that manufactures disposable cups, boxes, bags and containers is planning to invest in new machinery costing $3 million. The revenues and costs arising from this investment are shown below: $'00 0 Sales 2,70 0 Variable Cost of Sales 756 Other Fixed Operating Expenses 851 including tax-allowable depreciation Plastic R Us is considering financing the machinery exclusively by an issue of 8% bonds redeemable in 5 years time with a nominal value of $1,000. Plastics R Us has shared its budgeted profit and loss statement for the year ended 30th November 2018, as well as its budgeted statement of financial position as at 30th November 2018 below. These statements DO NOT take into consideration the effects of the machinery purchase or the financing option. \"Plastics R US\" Manufacturing Company Ltd Profit and Loss Statement for the year ended 30th November 2018 20X8 $000 Sales 21,000 Cost of Sales (100% variable costs) 12,500 Gross Profit 8,500 Other Operating Expenses (100% fixed 3,720 costs) Earnings Before Interest and Taxes (EBIT) 4,780 Interest 1,000 Earnings Before Tax 3,780 Tax 1,134 Earnings Available to Common 2,646 Shareholders (EACS) Dividends 1,323 Retained Earnings 1,323 Important information about \"Plastics R US\" costs: - Cost of Sales comprises ONLY variable costs - The corporation tax rate is 30% - Dividend cover is 2:1 \"Plastics R US\" Manufacturing Company Ltd Statement of Financial Position as at 30th November 2018 2018 $000 Non-current assets 33,0 00 Current assets 13,0 00 TOTAL ASSETS 46,0 00 Equity, Share capital and Reserves 10% bonds 20X2 Current Liabilities Total Liabilities TOTAL EQUITY AND LIABILITIES 32,0 00 10,0 00 4,00 0 14,0 00 46,0 00 Using the data above complete the following: a) Prepare a Profit and Loss Statement and a Statement of Financial Position for \"Plastics R Us\" to illustrate the effect of the additional $12 million investment. (Note: The additional $12 million investment will result in an increase in sales, operating expenses, financial expenses, assets, and liabilities and will also impact Gross Profit, E ). (10 marks) b) Calculate the firm's Degree of Operating Leverage (DOL) when sales were $21,000,000 (4 marks) c) Calculate the firm's Degree of Financial Leverage (DFL) when sales were $21,000,000 (4 marks) d) Calculate the firm's Degree of Total Leverage (DTL) when sales were $21,000,000 (2 marks) e) Using the DOL, DFL and DTL calculated in parts b to d, predict the impact of the investment on the firm's EBIT and EACS (5 marks) f) Discuss whether changing the capital structure of \"Plastics R US\" (i.e. increasing the proportion of debt relative to equity) can lead to a reduction in its cost of capital and hence an increase in the value of the company (10 marks)