DeSoto Tools Incorporated is planning to expand production. The expansion will cost $4,300,000, which can be financed either by bonds at an interest rate of 6 percent or by selling 86,000 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 @ 35% Earnings after taxes Shares Earnings per share $3,250,000 975,000 823,000 $ 1,452,000 630,000 $ 822,000 287,700 $ 534,300 330,000 $ 1.62 After the expansion, sales are expected to increase by $1,730,000. Variable costs will remain at 30 percent of sales, and fixed costs will Increase to $1,396,000. The tax rate is 35 percent.
DeSoto Tools Incorporated is planning to expand production. The expansion will cost $4,300,000, which can be financed either by bonds at an interest rate of 6 percent or by selling 86,000 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 @ 35% Earnings after taxes Shares Earnings per share $3,250,000 975,000 823,000 $ 1,452,000 630,000 $ 822,000 287,700 $ 534,300 330,000 $ 1.62 After the expansion, sales are expected to increase by $1,730,000. Variable costs will remain at 30 percent of sales, and fixed costs will Increase to $1,396,000. The tax rate is 35 percent.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:DeSoto Tools Incorporated is planning to expand production. The expansion will cost $4,300,000, which can be financed either by
bonds at an interest rate of 6 percent or by selling 86,000 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 @ 35%
Earnings after taxes
Shares
Earnings per share
$ 3,250,000
975,000
823,000
$ 1,452,000
630,000
$ 822,000
287,700
$ 534,300
After the expansion, sales are expected to increase by $1,730,000. Variable costs will remain at 30 percent of sales, and fixed costs will
increase to $1,396,000. The tax rate is 35 percent.
Degree of operating leverage
Degree of financial leverage
Degree of combined leverage
330,000
$ 1.62
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)
. For the degree of combined leverage,
(S-TVC-FC)
(S-TVC)
use the formula: DCL =
. These instructions apply throughout this problem.)
(S-TVC-FC-I)
Note: Round your answers to 2 decimal places.
5.18
1.00
1.00
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.
Common shares
Earnings per share
Degree of operating leverage
Degree of financial leverage
Degree of combined leverage
Debt
Debt
0
0
Equity
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.
Equity
0
0
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