Purchase Solution

# Break-even point for operating expenses

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Dale has just informed you that he is considering an expansion of his present facilities to accomodate additional bussiness. His 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 (10% costs) 200,000
________
Earnings before taxes (EBT) 500,000
Taxes (30%) 150,000
Earnings after taxes (EAT) 350,000

Shares of commom stock currently outstanding-200,000
Earnings per share: 1.75\$

Dales donust is currently financed at 50% debt 50% equity (common stock, par value 10\$ ) In order to expand the facilities, i have estimated that Dale will need to raise 2,000,000 in additional capital funds. The investment banker has laid out a plan for me and Dale to consider: sell 2,000,000 of additional common stock at 20\$ per share (100,000 shares).

Variable costs are expected to stay at 50% of sales, while fixed costs will increase by \$500,000 (raising up to \$2,300,000) Dales is not sure how much this expansion will add to sales, but he estimates that sales should increase by 1,000,000 per year for the next 5 years! For example, next years sales will be 6,000,000 then 7,000,000for the year after that and up to 10,000,000 in the fifth year.

Dale is excited about the new prospects and wants me to complete a detailed analysis of the expansion by doing the following:

1. Compute the break-even point for operating expenses before and after the expansion.
2. Compute the earning per share at 6,000,000 a year for the first year through 10,000,000 a year for the 5th year.

##### Solution Summary

Break-even point for operating expenses is summarized in this solution.

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• BA, Ain Shams University, Cairo Egypt
• MBA, California State University, Sacramento
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