Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share $ 6,900,000 3,450,000 1,990,000 $ 1,460,000 580,000 $ 880,000 308,000 $ 572,000 390,000 $ 1.47 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 $3.9 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $3.9 million of debt at 9 percent. 2. Sell $3.9 million of common stock at $25 per share. 3. Sell $1.95 million of debt at 8 percent and $1.95 million of common stock at $30 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,490,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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:

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share $ 6,900,000 3,450,000 1,990,000 $ 1,460,000 580,000 $ 880,000 308,000 $ 572,000 390,000 $ 1.47 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 $3.9 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $3.9 million of debt at 9 percent. 2. Sell $3.9 million of common stock at $25 per share. 3. Sell $1.95 million of debt at 8 percent and $1.95 million of common stock at $30 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,490,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 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:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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