Company considering expansion Income Statement is as follows Sales 6200000

    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.

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