A company is trying to decide whether to invest \(\$ 2\) million on plant expansion and \(\$ 1\) million to finance a related increase in inventories and accounts receivable. The \(\$ 3\) million expansion is expected to increase business volume substantially. Profit forecasts indicate that income from operations will rise from \(\$ 1.6\) million to \(\$ 2.4\) million. The income tax rate will be about \(40 \%\). Net income last year was \(\$ 918,000\). Interest expense on debt now outstanding is \(\$ 70,000\) per year. There are 200,000 shares of common stock currently outstanding.

The \(\$ 3\) million needed can be obtained in two alternative ways:

1. Finance entirely by issuing additional shares of common stock at an expected issue price of \(\$ 75\) per share.

2. Finance two-thirds with bonds, one-third with additional stock. The bonds would have a 20 -year life, bear interest at \(10 \%\), and sell at face value. The issue price of the stock would be \(\$ 80\) per share.

Should the investment be made? If so, explain which financing plan you would recommend. (Hint: Calculate earnings per share for last year and for future years under each of the alternatives.)