Question

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: Sell $3.5 million of debt at 11 percent. Sell $3.5 million of common stock at $25 per share. 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: 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 $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.) 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.) 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.) i need help with c-2 and d

Answer 1

Delsing Canning Company
		Before expansion	$3.5 Million Debt @ 11% (additional intrest - $385,000)		$3.5 Million common stock @ $25 ( 0.35 million additonal shares)		$1.75 Million Common stock @ $ 40 and 1.75 Million debt @ 10% ( Addiotnal int - $175,000) ( additional shares - 0.175 milion)
Sr No	Particulars	Before expansion	Sales - 7.5 Million	Sales 10.4 Million	Sales - 7.5 Million	Sales 10.4 Million	Sales - 7.5 Million	Sales 10.4 Million
1	Sales	$6,500,000	$7,500,000	$10,400,000	$7,500,000	$10,400,000	$7,500,000	$10,400,000
2	Variable cost	$3,250,000	$3,750,000	$5,200,000	$3,750,000	$5,200,000	$3,750,000	$5,200,000
3	PV Ratio	50%	50%	50%	50%	50%	50%	50%
4	Fixed Cost	$1,950,000	$2,450,000	$2,450,000	$2,450,000	$2,450,000	$2,450,000	$2,450,000
5	EBIT	$1,300,000	$1,300,000	$2,750,000	$1,300,000	$2,750,000	$1,300,000	$2,750,000
6	Intrest (10%)	$500,000	$885,000	$885,000	$500,000	$500,000	$675,000	$675,000
7	EBT	$800,000	$415,000	$1,865,000	$800,000	$2,250,000	$625,000	$2,075,000
8	Tax (30%)	$240,000	$124,500	$559,500	$240,000	$675,000	$187,500	$622,500
9	EAT	$560,000	$290,500	$1,305,500	$560,000	$1,575,000	$437,500	$1,452,500
10	Common shares	350000	350000	350000	700000	700000	525000	525000
11	EPS	1.6	0.8	3.7	0.8	2.3	0.8	2.8
12	Break Even Point	$3,900,000	$4,900,000	$4,900,000	$4,900,000	$4,900,000	$4,900,000	$4,900,000
13	Sales - TVC	$3,250,000	$3,750,000	$5,200,000	$3,750,000	$5,200,000	$3,750,000	$5,200,000
14	Sales - TVC - FC	$1,300,000	$1,300,000	$2,750,000	$1,300,000	$2,750,000	$1,300,000	$2,750,000
15	DOL	2.50	2.88	1.89	2.88	1.89	2.88	1.89
16	Degree of Financial Leverage	2.08	7.11	1.58	2.08	0.74	3.60	1.08