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Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share 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 $4.5 million in additional financing. His investment banker has laid out three plans for mim to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 million of common stock at $20 per share. Before expansion After expansion Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 a. The break-even point for operating expenses before and after expansion (in sales dollars). Note: Enter your answers in dollars not in millions, I.e, $1,234,567. Before expansion After expansion $ 1,000,000 350,000 $ 650,000 Break-Even Point 450,000 $ 1.44 Degree of financial leverage b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL=(S-TVC)/(S-TVC-FC). Note: Round your answers to 2 decimal places. Degree of Operating Leverage -1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places.

Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share 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 $4.5 million in additional financing. His investment banker has laid out three plans for mim to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 million of common stock at $20 per share. Before expansion After expansion Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 a. The break-even point for operating expenses before and after expansion (in sales dollars). Note: Enter your answers in dollars not in millions, I.e, $1,234,567. Before expansion After expansion $ 1,000,000 350,000 $ 650,000 Break-Even Point 450,000 $ 1.44 Degree of financial leverage b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL=(S-TVC)/(S-TVC-FC). Note: Round your answers to 2 decimal places. Degree of Operating Leverage -1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 7P
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Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (18% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share. 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 $4.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 million of common stock at $20 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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: Before expansion After expansion a. The break-even point for operating expenses before and after expansion (in sales dollars). Note: Enter your answers in dollars not in millions, I.e, $1,234,567. $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 1,000,000 350,000 $ $ 650,000 Before expansion After expansion 450,000 $ 1.44 Break-Even Point b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL = (S-TVC)/(S-TVC - FC). Note: Round your answers to 2 decimal places. Degree of financial leverage Degree of Operating Leverage c-1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places.
Transcribed Image Text:Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (18% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share. 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 $4.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 million of common stock at $20 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,550,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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: Before expansion After expansion a. The break-even point for operating expenses before and after expansion (in sales dollars). Note: Enter your answers in dollars not in millions, I.e, $1,234,567. $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 1,000,000 350,000 $ $ 650,000 Before expansion After expansion 450,000 $ 1.44 Break-Even Point b. The degree of operating leverage before and after expansion. Assume sales of $7.5 million before expansion and $8.5 million after expansion. Use the formula: DOL = (S-TVC)/(S-TVC - FC). Note: Round your answers to 2 decimal places. Degree of financial leverage Degree of Operating Leverage c-1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places.
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c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.5 million for this question. Note: Round your answers to 2 decimal places. 100% Debt 100% Equity 50% Debt & 50% Equity Degree of Financial Leverage d. Compute EPS under all three methods of financing the expansion at $8.5 million in sales (first year) and $10.3 million in sales (last year). Note: Round your answers to 2 decimal places. 100% Debt 100% Equity 50% Debt & 50% Equity Earnings per Share First Year Last Year
Transcribed Image Text:c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.5 million for this question. Note: Round your answers to 2 decimal places. 100% Debt 100% Equity 50% Debt & 50% Equity Degree of Financial Leverage d. Compute EPS under all three methods of financing the expansion at $8.5 million in sales (first year) and $10.3 million in sales (last year). Note: Round your answers to 2 decimal places. 100% Debt 100% Equity 50% Debt & 50% Equity Earnings per Share First Year Last Year
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