Problem:
Company X wants to create additional supply development space. The additional space will cost $450,000. The expansion can be financed either by bonds at an interest rate of 8%, or by selling 40,000 shares of common stock at $20 per share.
Current Income Statement
Sales $2,900,000
Less: Variable cost (25%) $392,000
Fixed cost 475,000
EBIT 867,000
Less: Interest expense 432,000
EBT 435,000
Less: Taxes @7% 30,450
EAT $404,550
Shares 127,000
Earnings per share $ 3.19
Lets say after the additional supply space, sales are expected to go up $109,500.
Variable cost will remain at 30% of sales, and fixed cost will go up $333,000. The tax rate is 30%.
Q1. Calculate the degree of operating leverage, the degree of financing leverage, and the degree of combined leverage before expansion.
Q2. Develop the income statement for two financial plans, Debt and Equity.
Q3. Calculate the degree of operating leverage, the degree of financial leverage, and degree of combined leverage after expansion, for the 2 financing plans