questionDeSoto Tools Inc. is planning to expand production. The expansion will cost $300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at$30 per share.
The current income statement before expansion is as follows:
| DeSOTO TOOLS, INC. Income Statement 20X1 | | |
|---|---|---|
| Sales | | $\$1,500,000$ |
| Less: Variable costs | $\$450,000$ | |
| Fixed costs | $550,000$ | $1,000,000$ |
| Earnings before interest and taxes | $\$ 500,000$ | |
| Less: Interest expense | | $100,000$ |
| Earnings before taxes | |$\$ 400,000$ |
| Less: Taxes @ 34% | | $136,000$ |
| Earnings after taxes | | $\$ 264,000$ |
| Shares | | $100,000$ |
| Earnings per share | | $\$ 2.64$ |
After the expansion, sales are expected to increase by $1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to$800,000. The tax rate is 34 percent. Explain which financing plan you favor and the risks involved with each plan. 3rd Edition•ISBN: 9781319070502C. Nathan DeWall, David G Myers956 solutions
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