DeSoto Tools Incorporated is planning to expand production. The expansion will cost $4,300,000, which can be financed either bybonds at an interest rate of 6 percent or by selling 86,000 shares of common stock at $50 per share. The current income statementbefore expansion is as follows:DESOTO TOOLS INCORPORATEDIncome Statement 20X1SalesVariable costsFixed costsEarnings before interest and taxesInterest expenseEarnings before taxesTaxes @ 35%Earnings after taxesSharesEarnings per share$ 3,250,000975,000823,000$ 1,452,000630,000$ 822,000287,700$ 534,300After the expansion, sales are expected to increase by $1,730,000. Variable costs will remain at 30 percent of sales, and fixed costs willincrease to $1,396,000. The tax rate is 35 percent.Degree of operating leverageDegree of financial leverageDegree of combined leverage330,000$ 1.62a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage beforeexpansion. (For the degree of operating leverage, use the formula: DOL= (S-TVC). For the degree of combined leverage,(S-TVC-FC)(S-TVC)use the formula: DCL =. These instructions apply throughout this problem.)(S-TVC-FC-I)Note: Round your answers to 2 decimal places.5.181.001.00 b. Construct the income statement for the two alternative financing plans.Note: Round EPS to 2 decimal places. Enter your answers as positive values.Common sharesEarnings per shareDegree of operating leverageDegree of financial leverageDegree of combined leverageDebtDebt00Equityc. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, afterexpansion.Note: Round your answers to 2 decimal places.Equity00

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Answered: DeSoto Tools Incorporated is planning…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 9MC

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The firm is contemplating the following (base case): Vehicle acquisition cost $ 48,000 Years of useful life (economic life) 1 Tax rate 25% Required rate of return on equity 11% Required return on debt 6% Debt ratio 40% Annual revenues $ 175,000 Operating expenses (excluding depreciation) $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What is the NPV of this investment? Should investment be considered?
The firm is contemplating the following (base case): Vehicle acquisition cost                                                     $ 48,000 Years of useful life (economic life)                                      1 Tax rate                                                                             25% Required rate of return on equity                                    11% Required return on debt                                                     6% Debt ratio                                                                          40% Annual revenues                                                         $ 175,000 Operating expenses (excluding depreciation)            $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What's the enterprise value?
The firm is contemplating the following (base case): Vehicle acquisition cost                                                     $ 48,000 Years of useful life (economic life)                                      1 Tax rate                                                                             25% Required rate of return on equity                                    11% Required return on debt                                                     6% Debt ratio                                                                          40% Annual revenues                                                         $ 175,000 Operating expenses (excluding depreciation)            $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What is the shareholder's total rate of return? Immediately after…
The firm is contemplating the following (base case): Vehicle acquisition cost                                                     $ 48,000 Years of useful life (economic life)                                      1 Tax rate                                                                             25% Required rate of return on equity                                    11% Required return on debt                                                     6% Debt ratio                                                                          40% Annual revenues                                                         $ 175,000 Operating expenses (excluding depreciation)            $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. Report how many dollars are distributed at year end to: a. to debt…

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