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The Norman Automatic Mailer Machine Company is planning to expand production because of the increased volume of mailouts. The increased mailout capacity will cost $3,500,000. The expansion can be financed either by bonds at an interest rate of 5 percent or by selling 70,000 shares of common stock at $50 per share. The current income statement (before expansion) is as follows:
Assume that after expansion, sales are expected to increase by $1,650,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase by $565,000. The tax rate is 40 percent.
Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (Enter only numeric value rounded to 2 decimal places.)
Construct the income statement for the two financial plans. (Input all amounts as positive values. Round EPS to 2 decimal places. Omit the "$" sign in your response.)
Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion, for the two financing plans. (Enter only numeric value rounded to 2 decimal places.)
NORMAN AUTOMATIC MAILER Income Statement 201X 

Sales. 



$ 
3,150,000 
Less: Variable costs (20%) 
$ 
630,000 



Fixed costs 

815,000 









Earnings before interest and taxes 




1,705,000 
Less: Interest expense 




550,000 






Earnings before taxes 




1,155,000 
Less: Taxes (@ 40%) 




462,000 






Earnings after taxes 



$ 
693,000 
Shares 




250,000 
Earnings per share 



$ 
2.77 
Dec 02 2019 View more View Less
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