Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: $5,900,000 2,950,000 1,890,000 $1,000,000 Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (30%) Earnings after taxes (EAT) Shares of common stock Earnings per share S $ 180,000 600,000 204,000 476,000 290,000 1.64 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 $2.9 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $2.9 million of debt at 11 percent. 2. Sell $2.9 million of common stock at $25 per share. 3. Sell $1.45 million of debt at 10 percent and $1.45 million of common stock at $40 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2.390.000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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:
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: $5,900,000 2,950,000 1,890,000 $1,000,000 Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (30%) Earnings after taxes (EAT) Shares of common stock Earnings per share S $ 180,000 600,000 204,000 476,000 290,000 1.64 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 $2.9 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $2.9 million of debt at 11 percent. 2. Sell $2.9 million of common stock at $25 per share. 3. Sell $1.45 million of debt at 10 percent and $1.45 million of common stock at $40 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2.390.000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
$5,900,000
2,950,000
1,890,000
$1,060,000
180,000
S 600,000
204,000
476,000
Sales
Variable costs (50% of sales)
Fixed costs
Earnings before interest and taxes (EBIT)
Interest (10% cost)
Earnings before taxes (EBT)
Tax (30%)
Earnings after taxes (EAT)
Shares of common stock
Earnings per share
S
290,000
1.64
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 $2.9 million in additional financing. His investment banker has laid out three plans for
him to consider:
1. Sell $2.9 million of debt at 11 percent.
2. Sell $2.9 million of common stock at $25 per share.
3. Sell $1.45 million of debt at 10 percent and $1.45 million of common stock at $40 per share,
Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2.390,000 per year. Delsing is not
sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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:
Transcribed Image Text:e-2. The degree of financial leverage for all three methods after expansion Assume sales of $6.9 million for this question. (Round your
answers to 2 decimal places.)
100% Debit
100% Equity
50% Debt & 50% Equity
Degree of Financial
Leverage
d. Compute EPS under all three methods of financing the expansion at $6.9 million in sales (first year) and $10.9 million in sales (ast
year). (Round your answers to 2 decimal places.)
100% Debt
100% Equity
50% Debt & 50% Equity
Earnings per Share
First Year
Last Year
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