Working with a partner, assume that a company needs $10 million in additional long-term capital. It currently has no debt and $40 million in equity. The options are issuing a 10-year bond (with an interest rate of 7%) or selling $10 million in new equity. You expect next year’s earnings before interest and taxes to be $5 million. (The company’s tax rate is 35%.) Prepare a memo outlining the advantages and disadvantages of debt and equity financing. Using the numbers provided, prepare a numerical illustration of leverage similar to the one shown in Figure 17.2.