The Lopez-Portillo Company has $12.2 million in assets, 80percent financed by debt and 20 percent financed by common stock.The interest rate on the debt is 9 percent and the par value of thestock is $10 per share. President Lopez-Portillo is considering twofinancing plans for an expansion to $26 million in assets.

Under Plan A, the debt-to-total-assets ratio will be maintained,but new debt will cost a whopping 12 percent! Under Plan B, onlynew common stock at $10 per share will be issued. The tax rate is30 percent.

a. If EBIT is 10 percent on total assets,compute earnings per share (EPS) before the expansion and under thetwo alternatives. (Round your answers to 2 decimalplaces.)

Earnings per share

Current ___________________

Plan A____________________

Plan B____________________

b. What is the degree of financial leverageunder each of the three plans? (Round your answers to 2decimal places.)

  Degree of financial leverage

Current____________________________

Plan A ____________________________

Plan B ____________________________

c. If stock could be sold at $20 per share dueto increased expectations for the firm’s sales and earnings, whatimpact would this have on earnings per share for the two expansionalternatives? Compute earnings per share for each. (Roundyour answers to 2 decimal places.)
   Earnings per share

Plan A _____________________

Plan B______________________