Question : Delsing Canning Company considering an expansion of its facilities. Its : 9233
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
Sales $ 6,500,000
Variable costs (50% of sales) 3,250,000
Fixed costs 1,950,000
Earnings before interest and taxes (EBIT) $ 1,300,000
Interest (10% cost) 500,000
Earnings before taxes (EBT) $ 800,000
Tax (30%) 240,000
Earnings after taxes (EAT) $ 560,000
Shares of common stock 350,000
Earnings per share $ 1.60
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 $3.5 million in additional financing. His investment banker has laid out three plans for him to consider:
1. Sell $3.5 million of debt at 11 percent.
2. Sell $3.5 million of common stock at $25 per share.
3. Sell $1.75 million of debt at 10 percent and $1.75 million of common stock at $40 per share.
Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,450,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.75 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:
Q: 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.)
Q:b. The degree of operating leverage before and after expansion. Assume sales of $6.5 million before expansion and $7.5 million after expansion. Use the formula: DOL = (S TVC) / (S TVC FC). (Round your answers to 2 decimal places.)
Q: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 $7.5 million for this question. (Round your answers to 2 decimal places.)
Q:d. Compute EPS under all three methods of financing the expansion at $7.5 million in sales (first year) and $10.4 million in sales (last year). (Round your answers to 2 decimal places.)