You are CEO of a high-growth technology firm. You plan to raise $170 million to fund an expansion by issuing either new shares or new debt. With the expansion, you expect earnings next year of $27 million. The firm currently has 10 million shares outstanding, with a price of $74 per share. Assume perfect capital markets.

a. If you raise the $170 million by selling new shares, what will the forecast for next year’s earnings per share be?

b. If you raise the $170 million by issuing new debt with an interest rate of 10%, what will the forecast for next year’s earnings per share be?

c. What is the firm’s forward P/E ratio (that is, the share price divided by the expected earnings for the coming year) if it issues equity? What is the firm’s forward P/E ratio if it issues debt?

How can you explain the difference?