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Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $28.80 per set, and this year’s sales are expected to be 450,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,200,000, and fixed production (operating) costs at present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 8%. There are 240,000 shares of common stock outstanding, and there is no
B. At what unit sales level would WCC have the same EPS assuming it undertakes the investment and finances it with debt and with stock?
C. At what unit sales level would EPS = 0 under the three production/financing setups—that is, under the old plan, the new plan with debt financing, and the new plan with stock financing?
D. D. On the basis of the analysis in Parts a through c and given that operating leverage is lower under the new setup, which plan is the riskiest, which has the highest expected EPS, and which would you recommend? Assume that there is a fairly high probability of sales falling as low as 250,000 units and determine EPSDebt and EPSStock at that sales level to help assess the riskiness of the two financing plans
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