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:

Sell $2.2 million of debt at 10 percent.
Sell $2.2 million of common stock at $20 per share.
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.)

e}ru:td”rewenssA”i”,:”n”ioptriscdeb_ta,”{}”:62″_],[0″:67″_l,ul:n1″_5,”llnu”:26″_},:{2″_3,”seal:ft”behalpwAhosS”ie,lsfa”:42″_1,:-0″_5,”-1″:24″_1,:-1″_3,”:05″”_0,”:_4,”seal:f8″_4,”{}”:37″_],1}29″:77″_1,13″:34″_[{“:23″_e,ru:t5″_4,”1″leit%20Tew”N”:mena,”}]seal:f7″_4,”:24″_5,”[]”:33″_},6″13:”1″”c”,13″1″:c0{“”:19″_},3″”2″:”2″,23:”1″,”9″”4″:”0:{9″_5,”]]}}e”nspoes%20rceaneroleTagntceer%20permbNulety”s”:_7,”e”agntceer”p”:70″_1,”:71″_},t”ghri:”8″_6,”uetr”:43″_”,ONTILUSO:”6″_7{“”:55″_},2}”:53″_2,”:21″_e,ru:t3″_6{“”:55″_”,ICERUM”N”:73″_:{9″_2,”}}”””:79″_”,)~36a(“~”:75″_:{6″_5,””}:”9″_7,””””:75″_:{0″_3{“”:_2{“”:20″_,{}}”}ONTIESQU:”6″_7{“”:55″_},”}:”9″_7,”n”ionspaexr%20teAf:”5″_7{“”:30″_:{2″”_:{0″_2{“,[}]”}seonspree%20ncraleTogetaenrcper%20beumeNylst:”7″”_”,getaenrcpe:”0″_7,”:11″_7,””}htig”r”:68″_e,ru:t3″_4,”N”IOUTOL”S”:76″_:{5″_5,”}}:23″_5,”:21″_2,”uetr”:63″_:{5″_5,”C”RIMENU:”3″_7{“”:29″_},”}:”9″_7,”~”0)(3~a:”5″_7{“”:56″_},”””:79″_”,:”5″_7{“”:30″_:{2″”_:{0″_2{“},}}N”IOSTUE”Q”:76″_:{5″_5,”}}”””:79″_”,onsianxp%20erefoBe:”5″_7{“”:30″_:{2″”_:{0″_2{“,[}]”})%3B30%2020,22,%2015(2gb%20rr:locod-unrokgac%20bx%3B0p:%20ntdeint-ex”t”:_8,”r”teeneCylstd%20oleBylst:”7″”_},)”30%2020,22,%2015(2gb”r”:_9,”r”teen”c”:68″_e,ru:t0″_1,”N”IOSTUE”Q”:76″_:{5″_5,”}}”””:79″_”,geraveLeg%20inaterOpf%20%20oeegrDe:”5″_7{“”:30″_:{2″”_:{0″_2{“},”})%3B30%2020,22,%2015(2gb%20rr:locod-unrokgac%20bx%3B0p:%20ntdeint-ex”t”:_8,”r”teeneCylstd%20oleBylst:”7″”_},)”30%2020,22,%2015(2gb”r”:_9,”r”teen”c”:68″_e,ru:t0″_1,”N”IOSTUE”Q”:76″_:{5″_5,”}}”””:79″_”,:”5″_7{“”:30″_:{2″”_:{0″_2{“[[“:13″_e,lsfa”:41″_},n”owpDro”d”:27″_1,:-5″_2,”{}”:75″_e,lsfa”:82″_:{8″_2,””””:22″_e,lsfa”:35″_e,ru:t6″_3,”{}”:55″_”,leab%20TedtltiUn:”9″_6,”:27″_1,”:38″_5{“:[5″_6{“

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 $6.2 million for this question. (Round your answers to 2 decimal places.)

e}ru:td”rewenssA”i”,:”n”ioptriscdeb_ta,”{}”:62″_],[0″:67″_l,ul:n1″_5,”llnu”:26″_},:{2″_3,”seal:ft”behalpwAhosS”ie,lsfa”:42″_1,:-0″_5,”-1″:24″_1,:-1″_3,”:05″”_0,”:_4,”seal:f8″_4,”{}”:37″_],2}33″:77″_4,15″:34″_[{“:23″_e,ru:t5″_4,”1″leit%20Tew”N”:mena,”}]seal:f7″_4,”:34″_5,”[]”:33″_},6″13:”1″”c”,54″1″:c0{“”:19″_},3″”2″:”3″,23:”2″,”3″”2″:”1″,49:”0″{“”:59″_],}]”}ermbNulety%20sceaneroleTagntceer%20pseonspret%20ghRilety”s”:_7,”e”agntceer”p”:70″_1,”:71″_},uetr”:43″_”,htig”r”:68″_”,ONTILUSO:”6″_7{“”:55″_},2}”:53″_2,”:21″_e,ru:t3″_6{“”:55″_”,ICERUM”N”:73″_:{9″_2,”}}”””:79″_”,)~63a(“~”:75″_:{6″_5,””}:”9″_7,””””:75″_:{0″_3{“”:_2{“”:20″_,{}}”}ONTIESQU:”6″_7{“”:55″_},”}:”9″_7,”y”itqu%20E0%25%205%20%26btDe%25%2050:”5″_7{“”:30″_:{2″”_:{0″_2{“,[}]”}ceaneroleTagntceer%20pseonsprer%20beumeNylst:”7″”_”,getaenrcpe:”0″_7,”:11″_7,””}htig”r”:68″_e,ru:t3″_4,”N”IOUTOL”S”:76″_:{5″_5,”}}:23″_5,”:21″_2,”uetr”:63″_:{5″_5,”C”RIMENU:”3″_7{“”:29″_},”}:”9″_7,”~”5)(5~a:”5″_7{“”:56″_},”””:79″_”,:”5″_7{“”:30″_:{2″”_:{0″_2{“},}}N”IOSTUE”Q”:76″_:{5″_5,”}}”””:79″_”,tyuiEq%25%2000″1″:75″_:{0″_3{“”:_2{“”:20″_[{],}}e”ncraleTogetaenrcpee%20nspoes%20rermbNulety”s”:_7,”e”agntceer”p”:70″_1,”:71″_},t”ghri:”8″_6,”uetr”:43″_”,ONTILUSO:”6″_7{“”:55″_},2}”:53″_2,”:21″_e,ru:t3″_6{“”:55″_”,ICERUM”N”:73″_:{9″_2,”}}”””:79″_”,)~47a(“~”:75″_:{6″_5,””}:”9″_7,””””:75″_:{0″_3{“”:_2{“”:20″_,{}}”}ONTIESQU:”6″_7{“”:55″_},”}:”9″_7,”t”eb%20D0%2510:”5″_7{“”:30″_:{2″”_:{0″_2{“,[}]”})%3B30%2020,22,%2015(2gb%20rr:locod-unrokgac%20bx%3B0p:%20ntdeint-ex”t”:_8,”r”teeneCylstd%20oleBylst:”7″”_},)”30%2020,22,%2015(2gb”r”:_9,”r”teen”c”:68″_e,ru:t0″_1,”N”IOSTUE”Q”:76″_:{5″_5,”}}”””:79″_”,geraveLel%20iancnaFif%20%20oeegrDe:”5″_7{“”:30″_:{2″”_:{0″_2{“},”})%3B30%2020,22,%2015(2gb%20rr:locod-unrokgac%20bx%3B0p:%20ntdeint-ex”t”:_8,”r”teeneCylstd%20oleBylst:”7″”_},)”30%2020,22,%2015(2gb”r”:_9,”r”teen”c”:68″_e,ru:t0″_1,”N”IOSTUE”Q”:76″_:{5″_5,”}}”””:79″_”,:”5″_7{“”:30″_:{2″”_:{0″_2{“[[“:13″_e,lsfa”:41″_},n”owpDro”d”:27″_1,:-5″_2,”{}”:75″_e,lsfa”:82″_:{8″_2,””””:22″_e,lsfa”:35″_e,ru:t6″_3,”{}”:55″_”,leab%20TedtltiUn:”9″_6,”:27″_1,”:48″_5{“:[5″_6{“

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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