DeSoto Tools Inc. is planning to expand production. The expansion will cost $4,5

Question

DeSoto Tools Inc. is planning to expand production. The expansion will cost $4,500,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 90,000 shares of common stock at $50 per current income statemenl betore expansion is as follows shae n 654,000 Varatle costs Fwed costs Eamings belfiore entenest and taxes lans @ 30% Eamings afher Saxes 350 000 228 Eamings per share expansion, sales are expected to increase by $1,750,000 Varlable costs w nemain at 20 pencent of sales, and iwed costs will ncrease to $1,400.000. The tax rate is 30 pence Aher the before expansion (For the degree of operating leverage, use the formula DOL (5-TVC)/(S-TVc-FC) a. Calolate the degree of operating ieverage. the degree of tnancial everage, and the degree of combined leverage For the degree of combined ieverage, use the o These instructiorns apply troughout this probiem) Round your answers to 2 decimal places) TVC-FC-

Explanation / Answer

Please see the below workings. Hope this helps

a) Operating leverage (S-TVC)/(S-TVC-FC) 1.46 1.54 1.54 b) Financial leverage (EBIT)/(EBIT-I) 1.57 1.63 1.33 c) Combined leverage (S-TVC)/(S-TVC-FC-I) 2.29 2.50 2.04

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