Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

  Sales$5,200,000Variable costs (50% of sales) 2,600,000Fixed costs 1,820,000Earnings before interest and taxes (EBIT)$780,000Interest (10% cost) 240,000Earnings before taxes (EBT)$540,000Tax (40%) 216,000Earnings after taxes (EAT)$324,000Shares of common stock 220,000Earnings per share$1.47 

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 $2.2 million in additional financing. His investment banker has laid out three plans for him to consider:

  1. Sell $2.2 million of debt at 10 percent.
  2. Sell $2.2 million of common stock at $20 per share.
  3. Sell $1.10 million of debt at 9 percent and $1.10 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 $2,320,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.10 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). (Enter your answers in dollars not in millions, i.e, $1,234,567.)

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b. The degree of operating leverage before and after expansion. Assume sales of $5.2 million before expansion and $6.2 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC). (Round your answers to 2 decimal places.)

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c-1. The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)

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c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $6.2 million for this question. (Round your answers to 2 decimal places.)

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d. Compute EPS under all three methods of financing the expansion at $6.2 million in sales (first year) and $10.2 million in sales (last year). (Round your answers to 2 decimal places.)

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