Problem: Highland Cable Company is considering an expansion of its facilities. Highland Cable is currently financed with 50 percent debt and 50% equity common stock par value of $10.To expand the facilities Mr Highland estimates a need for 2 million in additional financing. His investment banker has laid out three plans
1. Sell $2million of debt at 13%
2. Sell $2 million of common stock at $20 per share.
3. Sell 1 million debt at 12 % and 1 million of common stock at $25 per share.
Variable cost are expected to stay at 50% of sales while fixed expenses will increase to 1900,000 per year. Mr Highland is no sure how much this expansion will add to sales, but he estimates that sale will rise by 1million per year for the next five years.
I need the break even point for operating expanses before and after expansion in sale dollars.
Income Statement:
Sales 4,000,000
Less :Variable expense 50% of sales 2,000,000
Fixed expense 1,500,000
Earnings before interest and taxes EBIT 500,000
Interest 10% cost 140,000
Earning before taxes EBIT 360,000
Tax 30% 108,000
Earning after taxes EAT$252,000
Shares of common stock 200,000
Earnings per share $1.26