DeSoto Tools Incorporated is planning to expand production. The expansion will cost $2,600,000, which can be...

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DeSoto Tools Incorporated is planning to expand production. The expansion will cost $2,600,000, which can be financed either by bonds at an interest rate of 7 percent or by selling 52,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: DESOTO TOOLS INCORPORATED Income Statement 20X1 Sales Variable costs Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes @ 40% Earnings after taxes Earnings per share Shares $ 3,060,000 1,224,000 806,000 $ 1,030,000 460,000 $ 570,000 228,000 $ 342,000 160,000 $ 2.14 After the expansion, sales are expected to increase by $1,560,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase to $1,362,000. The tax rate is 40 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL DCL (S-TVC) (S-TVC-FC) (S-TVC) (S-TVC-FC-I) . For the degree of combined leverage, use the formula: These instructions apply throughout this problem.) Note: Round your answers to 2 decimal places. Degree of operating leverage Degree of financial leverage Degree of combined leverage b. Construct the income statement for the two alternative financing plans. Note: Round EPS to 2 decimal places. Enter your answers as positive values. Common shares Earnings per share Debt Equity DeSoto Tools Incorporated is planning to expand production. The expansion will cost $2,600,000, which can be financed either by bonds at an interest rate of 7 percent or by selling 52,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: DESOTO TOOLS INCORPORATED Income Statement 20X1 Sales Variable costs Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes @ 40% Earnings after taxes Earnings per share Shares $ 3,060,000 1,224,000 806,000 $ 1,030,000 460,000 $ 570,000 228,000 $ 342,000 160,000 $ 2.14 After the expansion, sales are expected to increase by $1,560,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase to $1,362,000. The tax rate is 40 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL DCL (S-TVC) (S-TVC-FC) (S-TVC) (S-TVC-FC-I) . For the degree of combined leverage, use the formula: These instructions apply throughout this problem.) Note: Round your answers to 2 decimal places. Degree of operating leverage Degree of financial leverage Degree of combined leverage b. Construct the income statement for the two alternative financing plans. Note: Round EPS to 2 decimal places. Enter your answers as positive values. Common shares Earnings per share Debt Equity

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DeSoto Tools Incorporated Expansion Analysis a Leverage Calculations Before Expansion Deg... View the full answer