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 $1.85 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).
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 = (S − TVC) / (S − TVC − FC). (Round your answers to 2 decimal places.)
c-1. The degree of financial leverage before expansion. (Round your answers 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. (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). (Round your answers to 2 decimal places.)