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The Norman Automatic Mailer Machine Company is planning to expand production because of th

The Norman Automatic Mailer Machine Company is planning to expand production because of th

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

Abhinav 02-Dec-2019

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