Business, 26.03.2020 21:10 patrickfutrell2537
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
Sales $ 7,500,000
Variable costs (50% of sales) 3,750,000Fixed costs 2,050,000
Earnings before interest and taxes (EBIT) $ 1,700,000
Interest (10% cost) 700,000
Earnings before taxes (EBT) $ 1,000,000
Tax (35%) 350,000
Earnings after taxes (EAT) $ 650,000
Shares of common stock 450,000
Earnings per share $ 1.44
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 $4.5 million in additional financing. His investment banker has laid out three plans for him to consider:
1.Sell $4.5 million of debt at 9 percent.
2.Sell $4.5 million of common stock at $15 per share.
3.Sell $2.25 million of debt at 8 percent and $2.25 million of common stock at $20 per share.
Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.25 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). (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 $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL = (S ? TVC) / (S ? TVC ? FC).(Round your answers to 2 decimal places.)
c-1. The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)
c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.5 million for this question. (Round your answers to 2 decimal places.)
d. Compute EPS under all three methods of financing the expansion at $8.5 million in sales (first year) and $10.3 million in sales (last year).(Round your answers to 2 decimal places.)
Answers: 2
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Delsing Canning Company is considering an expansion of its facilities. Its current income statement...
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