The stockholders' equity of Hardin Corporation consists of 250,000 shares of outstanding common stock on which the corporation has earned an average of \(\$ 0.50\) per share during each of the last three years. In an effort to increase earnings, management is planning an expansion that will require the investment of an additional \(\$ 1.5\) million in the business. The \(\$ 1.5\) million is to be acquired either by selling an additional 150,000 shares of the company's common stock at \(\$ 10\) per share or selling at par \(\$ 1.5\) million of \(8 \%, 20\)-year bonds. Management estimates that the expansion will double the company's before-tax earnings the first year after it is completed and will increase before-tax earnings an additional \(25 \%\) over that level in the years that follow.

Hardin Corporation's management wants to finance the expansion in the manner that will serve the best interests of present stockholders and has asked you to evaluate the two alternatives from this perspective. In your report, express an opinion as to the relative merits and disadvantages of each of the proposed ways of securing the funds needed for the expansion. Attach to your report a schedule that shows expected earnings per share of the common stockholders under each method of financing. In preparing your schedule, assume the company presently pays out in state and federal income taxes \(50 \%\) of its before-tax earnings and that it will continue to pay out the same share after the expansion.