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# Break Even Analysis, earnings per share

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:
Sales \$5,000,000
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.

#### Solution Summary

The solution explains how to calculate the brekeven point and earnings per share

\$2.19