Susie has just informed you that she is considering an expansion of her facilities to accommodate business growth. The current income statement is as follows:
Less: Variable expenses (50% of sales) $2,500,000
Fixed expenses $1,800,000
Earnings before interest and taxes (EBIT) $700,000
Interest expense (original note 10% cost) $200,000
Earnings before taxes $500,000
Taxes (30%) $150,000
Earnings after taxes (EAT) $350,000
Shares of common stock currently outstanding: 200,000
Earnings per share: $1.75
Susie's Cakes by Design is currently financed at 50% debt and 50% equity (common stock, par value $10). In order to expand the facilities, you have estimated that Susie will need to raise $2,000,000 in additional capital funds. Your investment banker has prepared a plan for consideration: Sell $2,000,000 of additional common stock at $20 per share (100,000 shares).
Variable costs are expected to remain at 50% of sales, while fixed costs will increase by $500,000 (totaling $2,300,000). Sales are estimated to increase by $1,000,000 annually for the next five years! For example, sales for next year are estimated to be $6,000,000 then $7,000,000 for the year after that â?¦.up to $10,000,000 in the fifth year.
Susie is excited about these new prospects, and she wants you to complete a detailed analysis of this expansion. She would like you to analyze the following:
1) Compute the break-even point for operating expenses before and after the expansion.
2) Compute the earnings per share for each year beginning at $6,000,000 in sales for the first year through $10,000,000 for the fifth year.
The solution explains how to calculate the brekeven point and earnings per share