Infinity Inc. is planning to expand production. The expansion will cost $300,000, which can either be financed by bonds at an interest rate of 15 percent or by selling 10,000 shares of common stock at $30 per share. The current income statement before expansion is as follows:

Infinity INC.

Income Statement

Year Ended Dec. 31, 20XX

Sales 2,000,000.00

Variable costs (30%) 600,000.00

Contribution margin 1,400,000.00

Fixed costs 550,000.00

EBIT 850,000.00

Interest expense 100,000.00

Earnings before taxes 750,000.00

Taxes @ 34% 255,000.00

Earnings after taxes 495,000.00

Shares 100,000.00

EPS 4.95

After the expansion, sales are expected to increase by $1,500,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to $800,000. The tax rate is 34 percent.

a. Calculate the DOL, the DFL, and the DCL before expansion. (Do not round the intermediate calculations. Round the final answers to 2 decimal places.)

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

c. Calculate the DOL, the DFL, and the DCL, after expansion, for the two financing plans. (Do not round the intermediate calculations. Round the final answers to 2 decimal places.)

d. Explain the risk involved with each financing plan.