1. Art Wyatt Pool Company wishes to finance a $15 million expansion program and is trying to decide between debt and external equity. Management believes that the market does not appreciate the companys profit potential and that the common stock is undervalued. What type of security (debt or common stock) do you suppose that the company will issue to provide financing, and what will be the markets reaction? What type of security do you think would be issued if management felt the stock were overvalued? Explain.

2. The H. M. Hornes Company is primarily owned by several wealthy Texans. The firm earned $3,500,000 after taxes this year. With 1 million shares outstanding, earnings per share were $3.50. The stock recently has traded at $72 per share, among the current shareholders. Two dollars of this value is accounted for by investor anticipation of a cash dividend. As financial manager of H. M. Hornes, you have contemplated the alternative of repurchasing some company common stock by means of a tender offer at $72 per share. a. How much common stock could the firm repurchase if this alternative were selected? b. Ignoring taxes, which alternative should be selected? c. Considering taxes, which alternative should be selected?