Delsing Canning Company is considering an expansion of its facilities its curren

Question

Delsing Canning Company is considering an expansion of its facilities its current income statement is as follows S 7,100 000 3,550,000 2010 000 Foxed costs s before interest and taxes (EBIT) 620 000 Earnings before taxes (EBT) Tax (30%) Eanings after taxes (EAT) Shares of common stock 644,000 share 31.57 The company is currently financed with 50 percent debt and 50 percent equity (common stock par value of $10) In order to expand the facines. Mr Detsing estmates a addtional financing. His investment banker has laid cut three plans for him to consider need for $4 1 mition n 1 Sell $4.1 million of debt at 11 percent 2 Sell $4.1 million of common stock at $20 per share Sell $2 05 miltion of debi at 10 percent and $2.05 million of common stock at $25 per share 7,e, $1,234,567.) sales

Explanation / Answer

a) At break-even before expansion Break Even point = FC + VC = Break Even Sales Sales = $2,010,000 + .50 Sales .50 Sales = $2,010,000 Sales = $2,010,000 / .50 $4,020,000.00 At break-even after expansion Break Even point = FC + VC = Break Even Sales Sales = $2,510,000 + .50 Sales .50 Sales = $2,510,000 Sales = $2,510,000 / .50 $5,020,000.00 b) Before Expansion DOL = (S TVC) / (S TVC FC) DOL = (7,100,000 - 3,550,000)/( 7,100,000 - 3,550,000 - 2,010,000) 2.31 After Expansion DOL = (S TVC) / (S TVC FC) DOL = (8,100,000 - 4,050,000)/( 8,100,000 - 4,050,000 - 2,510,000) 2.63 c) 1 DFL before expansion: DFL = EBIT/ EBIT - Interest DFL = $1,540,000/$1,540,000 - $620,000 1.67 c) 2 DFL after expansion Compute EBIT and Interest for all three plans 100% Debt 100% equity (50% Debt and50% Equity) Sales $8,100,000.00 $8,100,000.00 $8,100,000.00 Less Variable Cost $4,050,000.00 $4,050,000.00 $4,050,000.00 Less Fixed Cost $2,510,000.00 $2,510,000.00 $2,510,000.00 EBIT $1,540,000.00 $1,540,000.00 $1,540,000.00 Interest on old debt $620,000.00 $620,000.00 $620,000.00 Interest on New debt (4.1M x 11%); (2.05 M x 10%) $451,000.00 $0.00 $205,000.00 Total Interest $1,071,000.00 $620,000.00 $825,000.00 DF = EBIT/(EBIT - Interest) 3.28 1.67 2.15 d) 100% Debt 100% equity (50% Debt and50% Equity) Sales $8,100,000.00 $8,100,000.00 $8,100,000.00 Less Variable Cost $4,050,000.00 $4,050,000.00 $4,050,000.00 Less Fixed Cost $2,510,000.00 $2,510,000.00 $2,510,000.00 EBIT $1,540,000.00 $1,540,000.00 $1,540,000.00 Less: Interest $1,071,000.00 $620,000.00 $825,000.00 EBT $469,000.00 $920,000.00 $715,000.00 Less: Tax @ 30% $140,700.00 $276,000.00 $214,500.00 Net Income $328,300.00 $644,000.00 $500,500.00 Shares Outstanding Old Shares Outstanding 410000 410000 410000 New Shares Outstanding 0 205000 82000 Net Shares Outstanding ($4.1 M/$20),($2.05M/$25) 410000 615000 492000 EPS = Net Income/ Shares Outstanding $0.80 $1.05 $1.02 d) 100% Debt 100% equity (50% Debt and50% Equity) Sales $11,000,000.00 $11,000,000.00 $11,000,000.00 Less Variable Cost $5,500,000.00 $5,500,000.00 $5,500,000.00 Less Fixed Cost $2,510,000.00 $2,510,000.00 $2,510,000.00 EBIT $2,990,000.00 $2,990,000.00 $2,990,000.00 Less: Interest $1,071,000.00 $620,000.00 $825,000.00 EBT $1,919,000.00 $2,370,000.00 $2,165,000.00 Less: Tax @ 30% $575,700.00 $711,000.00 $649,500.00 Net Income $1,343,300.00 $1,659,000.00 $1,515,500.00 Shares Outstanding Old Shares Outstanding 410000 410000 410000 New Shares Outstanding 0 205000 82000 Net Shares Outstanding ($4.1 M/$20),($2.05M/$25) 410000 615000 492000 EPS = Net Income/ Shares Outstanding $3.28 $2.70 $3.08

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