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

Sales $ 7,000,000
Less: Variable expense (50% of sales) 3,500,000
Fixed expense 2,000,000

Earnings before interest and taxes (EBIT)

1,500,000
Interest (10% cost) 600,000

Earnings before taxes (EBT)

900,000
Tax (40%) 360,000

Earnings after taxes (EAT) $ 540,000
Shares of common stock 400,000
Earnings per share $ 1.35

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 $4.0 million in additional financing. His investment banker has laid out three plans for him to consider:

1.Sell $4.0 million of debt at 10 percent.

2.Sell $4.0 million of common stock at $20 per share.

3.Sell $2.00 million of debt at 9 percent and $2.00 million of common stock at $25 per share.

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,500,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.00 million per year for the next five years.
Delsing is interested in a thorough analysis of his expansion plans and methods of financing.

(a) The break-even point for operating expenses before and after expansion. (Enter your answers in dollars not in millions. Omit the "tiny_mce_markerquot; sign in your response.)

Break-even point
Before expansion $
After expansion $

(b) The degree of operating leverage before and after expansion. Assume sales of $7.0 million before expansion and $8.0 million after expansion. (Enter only numeric values rounded to 2 decimal places.)

Degree of
operating leverage
Before expansion
After expansion

(c-1) The degree of financial leverage before expansion. (Enter only numeric value rounded to 2 decimal places.)

Degree of financial leverage

(c-2) The degree of financial leverage for all three methods after expansion. Assume sales of $8.0 million for this question. (Round your answers to 2 decimal places.)

Degree of
financial leverage
100% Debt
100% Equity
50% Debt & 50% Equity

(d) Compute EPS under all three methods of financing the expansion at $8.0 million in sales (first year) and $10.9 million in sales (last year). (Round your answers to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

Earnings per share First year Last year
100% Debt $ $
100% Equity
50% Debt & 50% Equity