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

Sales	$	5,000,000
Less: Variable expense (50% of sales)		2,500,000
Fixed expense		1,800,000
Earnings before interest and taxes (EBIT)		700,000
Interest (10% cost)		200,000
Earnings before taxes (EBT)		500,000
Tax (34%)		170,000
Earnings after taxes (EAT)	$	330,000
Shares of common stock		200,000
EPS	$	1.65

Phelps Canning company is currently financed with 50 percent debt and 50 percent equity (common stock). To expand facilities, Mr. Phelps estimates a need for $2 million in additional financing. His investment dealer has laid out three plans for him to consider:

1. Sell $2 million of debt at 13 percent.
2. Sell $2 million of common stock at $20 per share.
3. Sell $1 million of debt at 12 percent and $1 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 $2,300,000 per year. Mr. Phelps 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.

Mr. Phelps 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 the answers in dollars not in millions.)

	Break-even point
Before expansion	$
After expansion	$

b. The DOL before and after expansion. Assume sales of $5 million before expansion and $6 million after expansion. (Round the final answers to 2 decimal places.)

	DOL
Before expansion	X
After expansion	X

c-1. The DFL before expansion at sales of $5 million. (Round the final answer to 2 decimal places.)

DFL X

c-2. The DFL for all three methods of financing after expansion. Assume sales of $6 million. (Round the final answers to 2 decimal places.)

	DFL
100% Debt	X
100% Equity	X
50% Debt & 50% Equity	X

d. Compute EPS under all three methods of financing the expansion at $6 million in sales (first year) and $10 million in sales (last year). (Round the final answers to 2 decimal places.)

EPS	First year	Last year
100% Debt	$	$
100% Equity
50% Debt & 50% Equity

e. Not available in Connect.

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