SCENARIO: ABC Inc. is planning to expand their production of bicycles. The expansion will cost $2,000,000 and sales are expected to increase to $4,500,000. The firm already carries $400,000/year in interest expense and is considering two financing options. Plan A is to borrow $2,000,000 @ 12% and plan B is to sell 40,000 shares of common stock @ $50/share. After the expansion, variable costs will remain at 40% of sales. Fixed costs will increase to $1,350,000 and the tax rate will remain at 34%. The current income statement before the expansion is posted below. The objective of the firm is to choose the plan which will increase earnings per shore (EPS) the greatest. ABC Inc. Income Statement Year Ended December 31, 2019 Sales (10,000 bicycles @ $300/ea..... Variable costs (10,000 bicycles @ $120/ea.... Contribution margin... Fixed costs... Earnings before interest and taxes (EBIT). Interest (1)...... Earnings before tax (EBT). Taxes Earnings after taxes (EAT). Shares. EPS... $3,000,000 1.200,000 1,800,000 800,000 1,000,000 400.000 600,000 204.000 $ 396.000 100,000 $3.96 1. Construct an income statement for year ended December 31, 2020 for each financing plan option. (22 pts) ABC Inc. Income Statement Year Ended December 31, 2020 + PLAN A-Debt PLAN B - Equity Sales -Variable costs Contribution margin -Fixed Costs EBIT (Operating Income) -Interest EBT -Taxes EAT Shares of common stock EPS 2. Based on an increase in earnings per share, which plan would the firm choose in order to finance the expansion? (1 pt) 3. Using the income statements generated in question one, calculate the degree of financial leverage (DFL) for each plan and explain what happens to earnings per share (EPS) for every percentage-point change in sales for the chosen plan. Round to two-decimal places. (3 pts) SCENARIO: ABC Inc. is planning to expand their production of bicycles. The expansion will cost $2,000,000 and sales are expected to increase to $4,500,000. The firm already carries $400,000/year in interest expense and is considering two financing options. Plan A is to borrow $2,000,000 @ 12% and plan B is to sell 40,000 shares of common stock @ $50/share. After the expansion, variable costs will remain at 40% of sales. Fixed costs will increase to $1,350,000 and the tax rate will remain at 34%. The current income statement before the expansion is posted below. The objective of the firm is to choose the plan which will increase earnings per shore (EPS) the greatest. ABC Inc. Income Statement Year Ended December 31, 2019 Sales (10,000 bicycles @ $300/ea..... Variable costs (10,000 bicycles @ $120/ea.... Contribution margin... Fixed costs... Earnings before interest and taxes (EBIT). Interest (1)...... Earnings before tax (EBT). Taxes Earnings after taxes (EAT). Shares. EPS... $3,000,000 1.200,000 1,800,000 800,000 1,000,000 400.000 600,000 204.000 $ 396.000 100,000 $3.96 1. Construct an income statement for year ended December 31, 2020 for each financing plan option. (22 pts) ABC Inc. Income Statement Year Ended December 31, 2020 + PLAN A-Debt PLAN B - Equity Sales -Variable costs Contribution margin -Fixed Costs EBIT (Operating Income) -Interest EBT -Taxes EAT Shares of common stock EPS 2. Based on an increase in earnings per share, which plan would the firm choose in order to finance the expansion? (1 pt) 3. Using the income statements generated in question one, calculate the degree of financial leverage (DFL) for each plan and explain what happens to earnings per share (EPS) for every percentage-point change in sales for the chosen plan. Round to two-decimal places. (3 pts)