Company considering expansion Income Statement is as follows
Sales 6200000
Less:Variable expenses=3100000
Fixed expenses=1920000
EBIT=1180000
Intrest= 440000
EBT= 740000
Tax 30%= 222000
EAT= 518000
Shares common stock= 320000
EPS=1.62
Financed with 50% debt and 50% equity in common stock par value of $10
estimated need of 3.2 in additional financing
He has three plans to consider
1=sale 3.2 million of debt at 14%
2=sale 3.2 million of common stock @ $20
3=sale 1.60 million of debt @13% and 1.60 common stock at $25
variable cost will stay the same at 50% of sales
fixed cost increase to 2420000 per year
estimate that sales will rise by 1.60 million a year for the next five years
a= the break even point for operating expenses before and after expansion
b=The degree of operating leverage before and after the expansion assume sales of 6.2 million befoe expansion and 7.2 million after the expansion
c-1=The degree of financial leverage before the expansion
c-2=the degree of financial leverage of all three after the expansion assume sales of 7.2 million
100% Debt=
100%Equity=
50%Debt&50%Equity=
d=Compute EPS under each method of financing expansion at 7.2 million in the first year and 10.1 million in the last year.