DeSoto Tools Inc. is planning to expand production. The expansion will cost
After the expansion, sales are expected to increase by
a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula developed in footnote 2; for the degree of combined leverage, use the formula developed in footnote 3. These instructions apply throughout this problem.)
b. Construct the income statement for the two alternative financing plans.
c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion.
d. Explain which financing plan you favor and the risks involved with each plan.
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