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

Sales $ 5,500,000

Variable costs (50% of sales) 2,750,000

Fixed costs 1,850,000

Earnings before interest and taxes (EBIT) $ 900,000

Interest (10% cost) 300,000

Earnings before taxes (EBT) $ 600,000

Tax (40%) 240,000

Earnings after taxes (EAT) $ 360,000

Shares of common stock 250,000 Earnings per share $ 1.44

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 $2.5 million in additional financing. His investment banker has laid out three plans for him to consider:

Sell $2.5 million of debt at 13 percent.

Sell $2.5 million of common stock at $20 per share.

Sell $1.25 million of debt at 12 percent and $1.25 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 $2,350,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.25 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.)

Before Expansion:

After Expansion:

b. The degree of operating leverage before and after expansion. Assume sales of $5.5 million before expansion and $6.5 million after expansion. Use the formula: DOL = (S ? TVC) / (S ? TVC ? FC). (Round your answers to 2 decimal places.)

Before Expansion:

After Expansion:

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

Degree of finanical leverage:

c-2. he degree of financial leverage for all three methods after expansion. Assume sales of $6.5 million for this question. (Round your answers to 2 decimal places.)

100% Debt:

100% Equity:

50% Debt & 50% Equity:

d. Compute EPS under all three methods of financing the expansion at $6.5 million in sales (first year) and $10.5 million in sales (last year). (Round your answers to 2 decimal places.)

100% Debt:

100% Equity:

50% Debt& 50% Equity:

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