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 mim 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. Before expansion After expansion 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 $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: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 a. The break-even point for operating expenses before and after expansion (in sales dollars). Note: Enter your answers in dollars not in millions, I.e, $1,234,567. Before expansion After expansion $ 1,000,000 350,000 $ 650,000 Break-Even Point 450,000 $ 1.44 Degree of financial leverage 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). Note: Round your answers to 2 decimal places. Degree of Operating Leverage -1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places.
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 mim 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. Before expansion After expansion 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 $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: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 a. The break-even point for operating expenses before and after expansion (in sales dollars). Note: Enter your answers in dollars not in millions, I.e, $1,234,567. Before expansion After expansion $ 1,000,000 350,000 $ 650,000 Break-Even Point 450,000 $ 1.44 Degree of financial leverage 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). Note: Round your answers to 2 decimal places. Degree of Operating Leverage -1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places.
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:Sales
Variable costs (50% of sales)
Fixed costs
Earnings before interest and taxes (EBIT)
Interest (18% 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 $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:
Before expansion
After expansion
a. The break-even point for operating expenses before and after expansion (in sales dollars).
Note: Enter your answers in dollars not in millions, I.e, $1,234,567.
$ 7,500,000
3,750,000
2,050,000
$ 1,700,000
700,000
1,000,000
350,000
$
$ 650,000
Before expansion
After expansion
450,000
$ 1.44
Break-Even Point
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).
Note: Round your answers to 2 decimal places.
Degree of financial leverage
Degree of Operating
Leverage
c-1. The degree of financial leverage before expansion.
Note: Round your answer to 2 decimal places.
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Transcribed Image Text:c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.5 million for this question.
Note: Round your answers to 2 decimal places.
100% Debt
100% Equity
50% Debt & 50% Equity
Degree of Financial
Leverage
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).
Note: 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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