High Sky, Inc., a hot-air balloon manufacturing firm, currently has the following simplified balance sheet:

Assets Liabilities and Capital Total assets $1,100,000 Bonds (10% interest) $600,000 Common stock at par ($3), 100,000 shares outstanding 300,000 Contributed capital in excess of par 100,000 Retained earnings 100,000 Total liabilities and capital $1,100,000 The company is planning an expansion that is expected to cost $600,000. The expansion can be financed with new equity (sold to net the company $4 per share)

or with the sale of new bonds at an interest rate of 11 percent. (The firm’s marginal tax rate is 40 percent.) P-9687