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. b. The degree of operating leverage before and after expansion. Assume sales of $7.1 million before expansion and $8.1 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC). Note: Round your answers to 2 decimal places. c-1. The degree of financial leverage before expansion. Note: Round your answer to 2 decimal places. c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.1 million for this question. Note: Round your answers to 2 decimal places.
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:
| Sales | $ 7,100,000 |
|---|---|
| Variable costs (50% of sales) | 3,550,000 |
| Fixed costs | 2,010,000 |
| Earnings before interest and taxes (EBIT) | $ 1,540,000 |
| Interest (10% cost) | 620,000 |
| Earnings before taxes (EBT) | $ 920,000 |
| Tax (30%) | 276,000 |
| Earnings after taxes (EAT) | $ 644,000 |
| Shares of common stock | 410,000 |
| Earnings per share | $ 1.57 |
The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $4.1 million in additional financing. His investment banker has laid out three plans for him to consider:
- Sell $4.1 million of debt at 11 percent.
- Sell $4.1 million of common stock at $20 per share.
- Sell $2.05 million of debt at 10 percent and $2.05 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 $2,510,000 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:
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.
b. The degree of operating leverage before and after expansion. Assume sales of $7.1 million before expansion and $8.1 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC).
Note: Round your answers to 2 decimal places.
c-1. The degree of financial leverage before expansion.
Note: Round your answer to 2 decimal places.
c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.1 million for this question.
Note: Round your answers to 2 decimal places.
d. Compute EPS under all three methods of financing the expansion at $8.1 million in sales (first year) and $11.0 million in sales (last year).
Note: Round your answers to 2 decimal places.
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