BUSI 320

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
 

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 $3.6 million in additional financing. His investment banker has laid out three plans for him to consider:
 

1. Sell $3.6 million of debt at 12 percent.
2. Sell $3.6 million of common stock at $30 per share.
3. Sell $1.80 million of debt at 11 percent and $1.80 million of common stock at $40 per share.

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,460,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.80 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:

a. The break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars not in millions, i.e, $1,234,567.)
  

b. The degree of operating leverage before and after expansion. Assume sales of $6.6 million before expansion and $7.6 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC). (Round your answers to 2 decimal places.)
  

c-1. The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)
  

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $7.6 million for this question. (Round your answers to 2 decimal places.)
  

d. Compute EPS under all three methods of financing the expansion at $7.6 million in sales (first year) and $10.5 million in sales (last year). (Round your answers to 2 decimal places.)
  

ANSWER POSTED IN EXCEL