MGMT 3320 Lecture Notes - Lecture 5: Operating Leverage, Income Statement, Fixed Cost
12 Jan 2018
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Q = 20,000, p = , vc = , fc = ,000, i = ,000. Q = 10,000, p = , vc = , fc = ,000, i = ,000. 5. 16 norman automatic mailer machine company: before expansion. ,000 + 12% (,000,000) = ,000 (1) new interest expense level if expansion is financed with debt: (2) number of common shares outstanding if expansion is financed with equity: 100,000 + 40,000 = 140,000: dol (same for both plans) ,240: the debt financing plan provides greater earnings per share level, but provides more risk because of the increased use of debt and higher dfl and dcl. The interest coverage ratio in both cases is satisfactory and interest coverage is well protected. The crucial point is expectations for future sales. If sales are expected to decline or advance very slowly, the debt plan will not perform well in comparison to the equity plan. Conversely, with increasing sales, the debt plan becomes more attractive.
