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

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

Sales$6,700,000
Variable costs (50% of sales )3,350,000
Fixed costs1,970,000
Earnings before interest and taxes (EBIT)$1,380,000
Interest (10z cost)540,000
Earnings before taxes (EBT)$840,000
Tax (408)336,000
Earnings after taxes (EAT)$504,000
Shares of common stock370,000
Earnings per share$1.36

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 $3.7 million in additional financing. His investment banker has laid out three plans for him to consider: 

1. Sell $3.7 million of debt at 13 percent 

2. Sell $3.7 million of common stock at $20 per share. 

3. Sell $1.85 million of debt at 12 percent and $1.85 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 $2,470,000 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). 

b. The degree of operating leverage before and after expansion. Assume sales of $6.7 million before expansion and $7.7 million after expansion. Use the formula: DOL = (S – TVO/(S- TVC - FC). 

c-1. The degree of financial leverage before expansion. (Round your answer to 2 decimal places.) 

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $7.7 million for this question. (Round your answers to 2 decimal places.) 

d. Compute EPS under all three methods of financing the expansion at $7.7 million in sales (first year) and $10.6 million in sales (last year). 

a. The break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollarsC-1. The degree of financial leverage before expansion. (Round your answer to 2 decimal places.) Degree of financial leveraged. Compute EPS under all three methods of financing the expansion at $7.7 million in sales (first year) and $10.6 million in


Solutions

Expert Solution

Answer to d part is continued in next page and in d part only total no of shares is calculated kindly refer.


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