Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 $ 700,000 1,000,000 350,000 650,000 $ 450,000 1.44 Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share 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 $4.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 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 $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.25 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). (Enter your answers in dollars not in millions, i.e. $1,234,567.) b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL = (S-TVC)/(S-TVC-FC). (Round your answers to 2 decimal places)
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 $ 700,000 1,000,000 350,000 650,000 $ 450,000 1.44 Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share 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 $4.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 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 $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.25 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). (Enter your answers in dollars not in millions, i.e. $1,234,567.) b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL = (S-TVC)/(S-TVC-FC). (Round your answers to 2 decimal places)
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 20P
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Transcribed Image Text:Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
$ 7,500,000
3,750,000
2,050,000
$ 1,700,000
700,000
1,000,000
$
350,000
$
650,000
450,000
1.44
Sales
Variable costs (50% of sales)
Fixed costs
Earnings before interest and taxes (EBIT)
Interest (10% cost)
Earnings before taxes (EBT)
Tax (35%)
Earnings after taxes (EAT)
Shares of common stock
Earnings per share
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 $4.5 million in additional financing. His
investment banker has laid out three plans for him to consider:
1. Sell $4.5 million of debt at 9 percent.
2. Sell $4.5 million of common stock at $15 per share.
3. Sell $2.25 million of debt at 8 percent and $2.25 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 $2,550,000 per
year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.25
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). (Enter your answers
in dollars not in millions, i.e. $1,234,567.)
b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and
$8.5 million after expansion. Use the formula: DOL = (S-TVC)/(S-TVC - FC). (Round your answers to 2
decimal places.)
C-1. The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)
-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.5 million for this
question. (Round your answers to 2 decimal places.)
100% Debt
100% Equity
50% Debt & 50% Equity
Degree of Financial
Leverage
100% Debt
100% Equity
50% Debt & 50% Equity
d. Compute EPS under all three methods of financing the expansion at $8.5 million in sales (first year) and $10.3
million in sales (last year). (Round your answers to 2 decimal places.)
Earnings per Share
First Year
Last Year
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