The company is currently financed with 50 percent debt and 50 percent equity (co
ID: 2731265 • Letter: T
Question
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 $2.1 million in additional financing. His investment banker has laid out three plans for him to consider:
1.Sell $2.1 million of debt at 9 percent.
2.Sell $2.1 million of common stock at $15 per share.
3.Sell $1.05 million of debt at 10 percent and $1.05 million of common stock at $20 per share.
Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,310,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.05 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:
The break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars not in millions, i.e, $1,234,567.)
The degree of operating leverage before and after expansion. Assume sales of $5.1 million before expansion and $6.1 million after expansion. Use the formula: DOL = (S TVC) / (S TVC FC).(Round your answers to 2 decimal places.)
The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)
The degree of financial leverage for all three methods after expansion. Assume sales of $6.1 million for this question. (Round your answers to 2 decimal places.)
Compute EPS under all three methods of financing the expansion at $6.1 million in sales (first year) and $10.1 million in sales (last year).(Round your answers to 2 decimal places.)
Earnings per share
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:Explanation / Answer
a.
b.
c-1.
DFL-before expansion = EBIT/EBT
= 740000/520000
= 1.42
c-2. DFL-after expansion:
Before After Sales 5100000 6150000 Variable costs 2550000 3075000 Contribution 2550000 3075000 PV ratio 50% 50% Fixed costs 1810000 2310000 BEP 3620000 4620000