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Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales .................. $5,500,000 Less: Variable expense (50% of sales) ..... 2,750,000 Fixed expense ............... 1,850,000 Earnings before interest and taxes (EBIT) .... 900,000 Interest (10% cost) .............. 300,000 Earnings before taxes (EBT) .......... 600,000 Tax (40%) ................. 240,000 Earnings after taxes (EAT) ......... $ 360,000 Shares of common stock—250,000 ....... Earnings per share ............ $1.44 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 $2.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $2.5 million of debt at 13 percent. 2. Sell $2.5 million of common stock at $20 per share. 3. Sell $1.25 million of debt at 12 percent and $1.25 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 $2,350,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.25 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:
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