Question

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: $ 6,800,000 3,400,000 1,980,000 $ 1,420,000 Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (30%) 560,000 860,000 258,000 Earnings after taxes (EAT) 24 602,000 Shares of common stock 380,000 24 Earnings per share 1.58 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 $3.8 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $3.8 million of debt at 14 percent. 2. Sell $3.8 million of common stock at $20 per share. 3. Sell $1.90 million of debt at 13 percent and $1.90 million of common stock at $25 per share. Variable costs are expected 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: to $2,480,000 per year. Delsing is stay at 50 percent of sales, while fixed expenses will increas 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.) Break-Even Point Before expansion 3,960,000 After expansion 4,960,000
Can you please help with section D? Thank you!

Answer 1

Solution- Section D

Case 1: 100% debt

Particulars	First year	Last year
Revenue	7,800,000	10,700,000
Variable costs (50% of sales)	3,900,000	5,350,000
Fixed costs	2,480,000	2,480,000
EBIT (Revenue -variable costs-fixed costs)	1,420,000	2,870,000
Interest [560,000+(3,800,000*14%)]	1,092,000	1,092,000
EBT	328,000	1,778,000
Earnings after tax (EBT*70%)	229,600	12,44,600
No. of equity shares	380,000	380,000
EPS (EAT/No. of shares)	0.60	3.28

Case 1: 100% equity

Particulars	First year	Last year
Revenue	7,800,000	10,700,000
Variable costs (50% of sales)	3,900,000	5,350,000
Fixed costs	2,480,000	2,480,000
EBIT (Revenue -variable costs-fixed costs)	1,420,000	2,870,000
Interest	560,000	560,000
EBT	860,000	2,310,000
Earnings after tax (EBT*70%)	602,000	1,617,000
No. of equity shares [380,000+(3,800,000/20)]	570,000	570,000
EPS (EAT/No. of shares)	1.06	2.84

Case 1: 50% debt and 50% equity

Particulars	First year	Last year
Revenue	7,800,000	10,700,000
Variable costs (50% of sales)	3,900,000	5,350,000
Fixed costs	2,480,000	2,480,000
EBIT (Revenue -variable costs-fixed costs)	1,420,000	2,870,000
Interest [560,000+(1,900,000*13%)]	807,000	807,000
EBT	613,000	2,063,000
Earnings after tax (EBT*70%)	429,100	1,444,100
No. of equity shares [380,000+(1,900,000/25)]	456,000	456,000
EPS (EAT/No. of shares)	0.94	3.17