Question

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 costs	1,970,000
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 stock	370,000
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). 

Answer 1

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