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Company X wants to create additional supply development space. The additional space will cost $450,000. The expansion can be financed either by bonds at an interest rate of 8%, or by selling 40,000 shares of common stock at $20 per share.Current Income StatementSales $2,900,000Less: Variable cost (25%) $392,000Fixed cost 475,000EBIT 867,000Less: Interest expense 432,000EBT 435,000Less: Taxes @7% 30,450EAT $404,550Shares 127,000Earnings per share $ 3.19
Lets say after the additional supply space, sales are expected to go up $109,500.Variable cost will remain at 30% of sales, and fixed cost will go up $333,000. The tax rate is 30%.
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