Daylight Solutions is a company considering a recapitalization plan that would increase its debt ratio and increase its interest expense. Daylight would issue new bonds and use the proceeds to buy back shares of its common stock. The Chief Financial Officer believes the plan will not change total assets or operating income, but that it will increase earnings per share (EPS). Assuming the CFOs estimates are correct, which of the following statements is most CORRECT?

1. If the plan reduces the WACC, the stock price will also likely decline.
2. Since the plan is expected to increase EPS, this implies that the net income is also expected to increase.
3. If the plan does increase the EPS, the stock price will automatically increase at the same rate.
4. Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.
5. Since the proposed plan increases Daylights financial risk, the companys stock price might still fall even if EPS increases.