22 Jul WHAT CAN WE LEARN FROM THE ANSWER TO PART D ABOUT THE ADVISABILITY OF THE THREE METHODS OF FINANCING THE EXPANSION?
Find break even point Show more Could someone help me with this problem I really have no idea where to start! Find break even point DOL DOF and EPS for Delsing Canning Company Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales $5500000 Less: Variable expense (50% of sales) 2700000 Fixed expense 1850000 Earnings before interest and taxes (EBIT). 900000 Interest (10% cost). 300000 Earnings before taxes (EBT). 600000 Tax (40%) 240000 Earnings after taxes (EAT). $ 360000 Shares of common stock250000.. Earnings per share.. $1.44 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 $2.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $2.5 million of debt at 13 percent. 2. Sell $2.5 million of common stock at $20 per share. 3. Sell $1.25 million of debt at 12 percent and $1.25 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 $2350000 per year. Delsing is not sure how much this expansion will add to sales but he estimates that sales will rise by $1.25 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 $5.5 million before expansion and $6.5 million after expansion. c. The degree of financial leverage before expansion and for all three methods of financing after expansion. Assume sales of $6.5 million for this question. d. Compute EPS under all three methods of financing the expansion at $6.5 million in sales (first year) and $10.5 million in sales (last year). e. What can we learn from the answer to part d about the advisability of the three methods of financing the expansion? Show less
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