Company X wants to create additional supply development space. The additional space will cost $450,000. The expansion can be financed either by bonds at an interest rate of 8%, or by selling 40,000 shares of common stock at $20 per share.
Current Income Statement
Sales $2,900,000
Less: Variable cost (25%) $392,000
Fixed cost 475,000
EBIT 867,000
Less: Interest expense 432,000
EBT 435,000
Less: Taxes @7% 30,450
EAT $404,550
Shares 127,000
Earnings per share $ 3.19
Lets say after the additional supply space, sales are expected to go up $109,500.
Variable cost will remain at 30% of sales, and fixed cost will go up $333,000. The tax rate is 30%.
- calculate the degree of operating leverage, the degree of financing leverage, and the degree of combined leverage before expansion.
- develop the income statement for two financial plans, Debt and Equity.
- calculate the degree of operating leverage, the degree of financial leverage, and degree of combined leverage after expansion, for the 2 financing plans.