a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL = (S ? TVC) / (S ? TVC ? FC). For the degree of combined leverage, use the formula: DCL = (S ? TVC) / (S ? TVC ? FC ? I). These instructions apply throughout this problem.) (Round your answers to 2 decimal places.)

b. Construct the income statement for the two alternative financing plans. (Round EPS to 2 decimal places.)

c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion. (Round your answers to 2 decimal places.)

DeSoto Tools, Inc. is planning to expand production. The expansion will cost $300,000, which can either be financed by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at $30 per share. The current income statement before expansion is as follows: DESOTO TOOLS, INC. Income Statement Year Ended Dec. 31, 20XX Sales $1,500,000 Variable costs (30%) 450,000 Contribution margin 1,050,000 Fixed costs 550,000 EBIT Interest expense Earnings before taxes Taxes @ 34% Earnings after taxes Shares EPS $ 264,000 100,000 $2.64 500,000 100,000 400,000 136,000