The Chew-Z Corporation is considering three possible financing arrangements to raise $10,000 of new capital. Currently, the capital structure of Chew-Z consists of no debt and $10,000 of equity.

There are 500 shares of common stock currently outstanding, selling at $20 per share. The Chew-Z is expected to generate $12,000 of earnings before interest and taxes next period. It is expected that the interest rate on any debt would be 10%. The three possible financing alternatives are:

Alternative 1: Finance completely with new equity.

Alternative 2: Finance using 50% debt and 50% new equity.

Alternative 3: Finance completely with new debt.

a. Calculate the following items for each alternative, assuming that there are no taxes on corporate income:

■ Earnings to owners

■ Earnings per share

■ Distribution of income between creditors and shareholders

b. Calculate the following items for each alternative, assuming that the marginal rate of tax on corporate income is 40%:

■ Earnings to owners

■ Earnings per share

■ Distribution of income among creditors, shareholders, and the government