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H Chapter 5 Problem 27 Detsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows Sales Lewe Variable expense (50% of sales) Fixed expense 5,500,000 2.750,000 1.850,000 Earnings before interest and taxes (EBIT) Interest (10% cost) 900,000 300,000 Earnings before taxes (EBT) Tax (40%) 600,000 240,000 $ Earnings after taxes (EAT) Shares of common stock Earning per share 360,000 250,000 1.44 $ 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 $2.5 million in additional financing His investment banker hastaid out three plans for him to consider 1. Sell $2.5 million of debt at 13 percent 2. Sell$2.5 million of common stock at $20 per share 3. Sell $1.25 million of debt at 12 percent and $1.25 million of common stock at $25 per share Variable costs we expected to stay at 50 percent of sales, while fixed expenses will increase to $2,350,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.25 million per year for the next five years, Delising is interested in a thorough analysis of his expansion plans and methods of financing he would like you to analyze the following The break even point for operating expenses before and after expansion in sales dollars) (Enter your answers in dollars not in millions) The degree of operating leverage before and after expansion. Assume sales of $5.5 million before expansion and 56.5 million after expansion. Use the formula in footnote 2 of the chapter only numerie les rounded to 2 decimal places) The degree of financial leverage before expansion. Inter only numeric value rounded to 2 decimal places) Pr 3-37 Pr 4-26 Pr 5-27 C D H M The degree of financial leverage for all three methods after expansion. Assume sales of $6.5 million for this question (Enter only numeric values rounded to 2 decimal places.) Compute EPS under all three methods of financing the expansion at $6.5 million in sales (first year and $10.5 million in sales last year). Round your answers to 2 decimal places) All input values are shown in yellow. Only these values need chanped to review alpowerulon. Answers we died in red. Input variables Sales Variable costs Variablecostales Fixed costs EBIT Interest Interest rate Tawe Tax rate EAT Shares of common stock EPS $5.500,000 $2,750,000 50 percent $1,850,000 $900,000 $300,000 10 percent $600,000 240000 40 percent REFI 250,000 REF Debt/Assets Equity/ Par value per share Additional financing Plan 1: New debt Plan 1: Interest rate on debt Plan 2: New equity Plan 2: Price per share Plan 3: New debt Plan Interest rate on debt Plan 3 New equity Plan 3: Price per share Plan 1, 2 and 3: Newfixed costs Plan 1,2 and 3: Sales increase b. Pre-expansion sales b. Post-expansion sales d. Sales first year d. Sales last year 50 percent 50 percent $10 $2,500,000 $2,500,000 13 percent $2.500,000 $20 $1,200,000 12 percent $1,200,000 $25 $2,350,000 $1,250,000 per year for $5,500,000 $6,750,000 $5,500,000 $11.750,000 5 years Pr 3-37 Pr 4-26 Pr 5-27 + D F G L M N Solution and Explanation 2 Sales Pre expansion Post-expansion $3,700,000 $4,700,000 b. Pre expansion 3.06 Postopansion 1.61 DOL 6-1 DOL 1.50 2. All debt $6,750,000 All equity $6.750,000 SOX/50% $6.750,000 Sales Variable costs Fixed costs 2,350,000 2,350,000 2,350,000 EBIT $4,400,000 $4,400,000 $4,400,000 $300,000 Interest on old debt Interest on new debt $300,000 325,000 $300,000 144,000 Total interest $625,000 $ 300,000 $444,000 DRE 5.81 2.73 d. Sales All debt Al equity SOX/SON EBIT Interest SO $0 SO Taxes EAT so SO 19 Total shares EPS All debt Al equity SOX/50% Sales Variable costs Fixed Costs 2,350,000 2,350,000 2,350,000 EBIT $2,350,000 $2,350,000 $2,350,000 0 6 H 1 K L M EBIT Interest $2,350,000 $2,350,000 625,000 300,000 $2,350,000 444,000 EBT Taxes -52.975,000 $2,650,000 -$2.794,000 36 37 38 39 40 41 42 43 44 45 46 EAT $2.975,000 $2,650,000 $2,794,000 Total shares EPS 48 49 50 51 52 53 SS 56 57 58 59 60 61 -62 63 65 56 67 68 69 70 71 72 73 -74 75 76 77 RSSM 329 Pr 3-37 Pr 4-26 Pr 5-27 H Chapter 5 Problem 27 Detsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows Sales Lewe Variable expense (50% of sales) Fixed expense 5,500,000 2.750,000 1.850,000 Earnings before interest and taxes (EBIT) Interest (10% cost) 900,000 300,000 Earnings before taxes (EBT) Tax (40%) 600,000 240,000 $ Earnings after taxes (EAT) Shares of common stock Earning per share 360,000 250,000 1.44 $ 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 $2.5 million in additional financing His investment banker hastaid out three plans for him to consider 1. Sell $2.5 million of debt at 13 percent 2. Sell$2.5 million of common stock at $20 per share 3. Sell $1.25 million of debt at 12 percent and $1.25 million of common stock at $25 per share Variable costs we expected to stay at 50 percent of sales, while fixed expenses will increase to $2,350,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.25 million per year for the next five years, Delising is interested in a thorough analysis of his expansion plans and methods of financing he would like you to analyze the following The break even point for operating expenses before and after expansion in sales dollars) (Enter your answers in dollars not in millions) The degree of operating leverage before and after expansion. Assume sales of $5.5 million before expansion and 56.5 million after expansion. Use the formula in footnote 2 of the chapter only numerie les rounded to 2 decimal places) The degree of financial leverage before expansion. Inter only numeric value rounded to 2 decimal places) Pr 3-37 Pr 4-26 Pr 5-27 C D H M The degree of financial leverage for all three methods after expansion. Assume sales of $6.5 million for this question (Enter only numeric values rounded to 2 decimal places.) Compute EPS under all three methods of financing the expansion at $6.5 million in sales (first year and $10.5 million in sales last year). Round your answers to 2 decimal places) All input values are shown in yellow. Only these values need chanped to review alpowerulon. Answers we died in red. Input variables Sales Variable costs Variablecostales Fixed costs EBIT Interest Interest rate Tawe Tax rate EAT Shares of common stock EPS $5.500,000 $2,750,000 50 percent $1,850,000 $900,000 $300,000 10 percent $600,000 240000 40 percent REFI 250,000 REF Debt/Assets Equity/ Par value per share Additional financing Plan 1: New debt Plan 1: Interest rate on debt Plan 2: New equity Plan 2: Price per share Plan 3: New debt Plan Interest rate on debt Plan 3 New equity Plan 3: Price per share Plan 1, 2 and 3: Newfixed costs Plan 1,2 and 3: Sales increase b. Pre-expansion sales b. Post-expansion sales d. Sales first year d. Sales last year 50 percent 50 percent $10 $2,500,000 $2,500,000 13 percent $2.500,000 $20 $1,200,000 12 percent $1,200,000 $25 $2,350,000 $1,250,000 per year for $5,500,000 $6,750,000 $5,500,000 $11.750,000 5 years Pr 3-37 Pr 4-26 Pr 5-27 + D F G L M N Solution and Explanation 2 Sales Pre expansion Post-expansion $3,700,000 $4,700,000 b. Pre expansion 3.06 Postopansion 1.61 DOL 6-1 DOL 1.50 2. All debt $6,750,000 All equity $6.750,000 SOX/50% $6.750,000 Sales Variable costs Fixed costs 2,350,000 2,350,000 2,350,000 EBIT $4,400,000 $4,400,000 $4,400,000 $300,000 Interest on old debt Interest on new debt $300,000 325,000 $300,000 144,000 Total interest $625,000 $ 300,000 $444,000 DRE 5.81 2.73 d. Sales All debt Al equity SOX/SON EBIT Interest SO $0 SO Taxes EAT so SO 19 Total shares EPS All debt Al equity SOX/50% Sales Variable costs Fixed Costs 2,350,000 2,350,000 2,350,000 EBIT $2,350,000 $2,350,000 $2,350,000 0 6 H 1 K L M EBIT Interest $2,350,000 $2,350,000 625,000 300,000 $2,350,000 444,000 EBT Taxes -52.975,000 $2,650,000 -$2.794,000 36 37 38 39 40 41 42 43 44 45 46 EAT $2.975,000 $2,650,000 $2,794,000 Total shares EPS 48 49 50 51 52 53 SS 56 57 58 59 60 61 -62 63 65 56 67 68 69 70 71 72 73 -74 75 76 77 RSSM 329 Pr 3-37 Pr 4-26 Pr 5-27

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