Problem 5-27 (Algo) Expansion, break-even analysis, and leverage [LO5-2, 5-3, 5-4]

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

Sales	$ 6,800,000
Variable costs (50% of sales)	3,400,000
Fixed costs	1,980,000
Earnings before interest and taxes (EBIT)	$ 1,420,000
Interest (10% cost)	560,000
Earnings before taxes (EBT)	$ 860,000
Tax (30%)	258,000
Earnings after taxes (EAT)	$ 602,000
Shares of common stock	380,000
Earnings per share	$ 1.58

The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $3.8 million in additional financing. His investment banker has laid out three plans for him to consider:

Sell $3.8 million of debt at 14 percent.

Sell $3.8 million of common stock at $20 per share.

Sell $1.90 million of debt at 13 percent and $1.90 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 $2,480,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 million per year for the next five years.

Delsing 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).

Note: Enter your answers in dollars not in millions, i.e, $1,234,567.

b. The degree of operating leverage before and after expansion. Assume sales of $6.8 million before expansion and $7.8 million after expansion. Use the formula: DOL=(STVC)(STVCFC)DOL=S-TVCS-TVC-FC .

Note: Round your answers to 2 decimal places.

c-1. The degree of financial leverage before expansion.

Note: Round your answer to 2 decimal places.

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $7.8 million for this question.

Note: Round your answers to 2 decimal places.

d. Compute EPS under all three methods of financing the expansion at $7.8 million in sales (first year) and $10.7 million in sales (last year).

Note: Round your answers to 2 decimal places.