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Delsing Canning Company is considering an expansion of its facilities Its current income statement is as follows Sales

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:

Apr 01 2020 View more View Less

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