The Norman Automatic Mailer Machine Company is planning to expand production because of the increased volume of mailouts. The increased mailout capacity will cost $3,500,000. The expansion can be financed either by bonds at an interest rate of 5 percent or by selling 70,000 shares of common stock at $50 per share. The current income statement (before expansion) is as follows:

NORMAN AUTOMATIC MAILER Income Statement 201X
Sales.				$	3,150,000
Less: Variable costs (20%)	$	630,000
Fixed costs		815,000
Earnings before interest and taxes					1,705,000
Less: Interest expense					550,000
Earnings before taxes					1,155,000
Less: Taxes (@ 40%)					462,000
Earnings after taxes				$	693,000
Shares					250,000
Earnings per share				$	2.77

Assume that after expansion, sales are expected to increase by $1,650,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase by $565,000. The tax rate is 40 percent.

(a)	Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (Enter only numeric value rounded to 2 decimal places.)

Degree of operating leverage
Degree of financial leverage
Degree of combined leverage

(b)	Construct the income statement for the two financial plans. (Input all amounts as positive values. Round EPS to 2 decimal places. Omit the "$" sign in your response.)

	Debt			Equity

$			$

Common shares
Earnings per share	$			$

(c)	Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion, for the two financing plans. (Enter only numeric value rounded to 2 decimal places.)

	Debt	Equity
Degree of operating leverage
Degree of financial leverage
Degree of combined leverage

(d)

Which financing plan you favor?

	Equity plan
	Debt plan