DeSoto Tools Incorporated is planning to expand production. The expansion will cost $3,000,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 60,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: Sales Variable costs DESOTO TOOLS INCORPORATED Income Statement 20x11 Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes 30%. Earnings after taxes i Shares Earnings per share $ 3,100,000 620,000 810,000 $ 1,670,000 500,000 $1,170,000 351,000 $ 819,000 200,000 $ 4.10 After the expansion, sales are expected to increase by $1,600,000. Variable costs will remain at 20 percent of sales, and fixed costs will increase to $1,370,000. The tax rate is 30 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL= (S-TVC-FC) For the degree of combined leverage, use . These instructions apply throughout this problem.) (S-TVC-FC-1) Note: Round your answers to 2 decimal places. (S-TVC) the formula: DCL =
DeSoto Tools Incorporated is planning to expand production. The expansion will cost $3,000,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 60,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: Sales Variable costs DESOTO TOOLS INCORPORATED Income Statement 20x11 Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes 30%. Earnings after taxes i Shares Earnings per share $ 3,100,000 620,000 810,000 $ 1,670,000 500,000 $1,170,000 351,000 $ 819,000 200,000 $ 4.10 After the expansion, sales are expected to increase by $1,600,000. Variable costs will remain at 20 percent of sales, and fixed costs will increase to $1,370,000. The tax rate is 30 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL= (S-TVC-FC) For the degree of combined leverage, use . These instructions apply throughout this problem.) (S-TVC-FC-1) Note: Round your answers to 2 decimal places. (S-TVC) the formula: DCL =
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:DeSoto Tools Incorporated is planning to expand production. The expansion will cost $3,000,000, which can be financed either by
bonds at an interest rate of 8 percent or by selling 60,000 shares of common stock at $50 per share. The current income statement
before expansion is as follows:
DESOTO TOOLS INCORPORATED
Income Statement 20x1
Sales
Variable costs
Fixed costs
Earnings before interest and taxes
Interest expense
Earnings before taxes
Taxes 30%
Earnings after taxes
Shares
Earnings per share
$ 3,100,000
620,000
810,000
$ 1,670,000
500,000
$ 1,170,000
351,000
$ 819,000
200,000
$4.10
After the expansion, sales are expected to increase by $1,600,000. Variable costs will remain at 20 percent of sales, and fixed costs
will increase to $1,370,000. The tax rate is 30 percent.
a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before
expansion. (For the degree of operating leverage, use the formula: DOL=
For the degree of combined leverage, use
(S-TVC)
(S-TVC-FC)
the formula: DCL =
These instructions apply throughout this problem.)
Note: Round your answers to 2 decimal places.
(S-TVC)
(S-TVC-FC-1)
Degree of operating leverage
Degree of financial leverage
1.49
1.43
Transcribed Image Text:b. Construct the income statement for the two alternative financing plans.
Note: Round EPS to 2 decimal places. Enter your answers as positive values.
Sales
Common shares
Earnings per share
Degree of operating leverage
Degree of financial leverage
Degree of combined leverage
Debt
c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after
expansion.
Note: Round your answers to 2 decimal places.
Debt
Equity
Equity
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