The Norman Automatic Mailer Machine Company is planning to expand production. The expansion will cost $2,000,000, which can either be financed by bonds at an interest rate of 12 percent or by selling 40,000 shares of common stock at $50 per share. The current income statement before expansion is as follows:

NORMAN AUTOMATIC MAILER
Income Statement
Year ended Dec. 31,2014

Sales.............. ...................................$3,000,000

Variable costs (40%)............................1,200,000
Contribution margin ........ . .................1,800,000
Fixed costs ................ . .. .. .. . ....... ......800,000
EBIT ............... . ........ . . . .. .. . ....... ..1,000,000
Interest expense ........... . .....................400,000
Earnings before taxes...........................600,000
Taxes@ 34% .............. . .......................204,000
Earnings after taxes .......... . .. .. .. .. .$ 396,000
Shares ...................... . . . .. .. . .......... .100,000
EPS..........................................................$3.96

After the expansion, sales are expected to increase by $1 ,500,000. Variable costs will remain at 40 percent of sales, and fixed costs will increase to $550,000. The tax rate is 34 percent.
a. Calculate the DOL, the DFL, and the DCL before expansion. Explain the effects on earnings of a sales increase.
b. Construct the income statement for the two financial plans.
c. Calculate the DOL, the DFL, and the DCL, after expansion, for the two financing plans.
d. Calculate the EBIT/EPS indifference point with the formula in the chapter.
e. Explain which financing plan you favour and the risks involved.