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 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 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 30th 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 20X2	10,000
Current Liabilities	4,000
Total Liabilities		14,000
TOTAL EQUITY AND LIABILITIES		46,000

Using the data above complete the following:

1. 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)

2. Calculate the firms Degree of Operating Leverage (DOL) when sales were $21,000,000 (4 marks)

3. Calculate the firms Degree of Financial Leverage (DFL) when sales were $21,000,000 (4 marks)

4. Calculate the firms Degree of Total Leverage (DTL) when sales were $21,000,000 (2 marks)

5. Using the DOL, DFL and DTL calculated in parts b to d, predict the impact of the investment on the firms EBIT and EACS (5 marks)

6. 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)