Problem $1(37$ marks$)$

Rosebush Flowers Inc. operates a number of flower shops in Halifax. The firm is considering an

expansion project in Dartmouth Crossing. Below is their most recent set of financial statements.

Using the financial statements above, determine the following:

a$)$ Rosebush's current degree of operating leverage $($DOL$).(3$ Marks$)$

b$)$ Rosebush's current degree of financial leverage $($DFL$).(3$ Marks$)$

c$)$ The impact of a $15\%$ decrease in sales would have on EPS $($in $\%).$ Show your work. $(3$

Marks$)$

d$)$ Rosebush is considering expanding into Dartmouth Crossing at a cost of $$250,000.$ In order to

finance the expansion, Rosebush has been presented with the following options:

Option #$1$: Finance the $$250,000$ expansion with new bonds. The bonds will have a call feature so

will be riskier than the company's current debt; they will have a coupon rate of $9\mathrm{.}5\%.$

Option #$2$: Finance the $$250,000$ expansion with new common shares at $$10$ per share.

i$.$ Calculate the level of EBIT that will produce the same EPS under both plans. $(18$ Marks$)$

ii$.$ What level of EPS corresponds to this level of EBIT. $(4$ Marks$)$

iii. If EBIT is expected to be $$175,000,$ which plan would maximize EPS? Explain. $(4$ Marks$)$

iv$.$ Should the plan selected in part $($iii$)$ be unconditionally chosen or should other factors be

considered in selecting the financing option? Explain. $(2$ Marks$)$