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Problem 5-27 (Algo) Expansion, break-even analysis, and leverage [LO5-2, 5-3, 5-4] 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 (10% cost) 540,000 Earnings before taxes (EBT) $ 840,000 Tax (40%) 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: Sell $3.7 million of debt at 13 percent. Sell $3.7 million of common stock at $20 per share. 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). Note: Enter your answers in dollars not in millions, i.e, $1,234,567. 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=(STVC)(STVCFC) . Note: Round your answers to 2 decimal places. c-1. The degree of financial leverage before expansion. Note: 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. Note: 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). Note: Round your answers to 2 decimal places. Problem 5-27 (Algo) Expansion, break-even analysis, and leverage [LO5-2, 5-3, 5-4] 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 (10% cost) 540,000 Earnings before taxes (EBT) $ 840,000 Tax (40%) 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: Sell $3.7 million of debt at 13 percent. Sell $3.7 million of common stock at $20 per share. 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). Note: Enter your answers in dollars not in millions, i.e, $1,234,567. 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=(STVC)(STVCFC) . Note: Round your answers to 2 decimal places. c-1. The degree of financial leverage before expansion. Note: 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. Note: 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). Note: Round your answers to 2 decimal places.

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