DMC currently has 100,000 shares of common stock outstanding with a market price of $50 per share. It also has $2 million in 7% bonds currently selling at par. The company is considering a $4 million...

DMC currently has 100,000 shares of common stock outstanding with a market price of $50 per share. It
also has $2 million in 7% bonds currently selling at par. The company is considering a $4 million
expansion program that it can finance either (I) all common stock at $50 per share, or (II) all bonds at 9%.
The company estimates that if the expansion is undertaken, it can attain, in the near future, $1 million
EBIT.
a. The company’s tax rate is 40%. Calculate EPS for each plan.
b. Draw the EBIT-EPS graph.
c. What is the break-even or indifference point between the two alternatives?
d. Due to expansionary credit conditions / monetary policy, you expect that sales and EBIT next year
would be greater than the break-even calculated in © above, what form of financing would you
recommend?
e. Which plan is riskier, I or II? Why?