7. The Bardstown Boot Company has a current capital structure containing both debt and equity. The company desires to raise additional capital and has calculated an indifference level of EBIT to be $300,000, between a financing option that will add more debt to the companys current capital structure and an option that will raise capital through the sale of common stock. Total interest expense under the debt option will be $200,000 per year, and under the equity option total interest expense will be $100,000. The EBIT for the company is expected to be normally distributed, with a mean of $420,000 and a standard deviation of $190,000.

1. What is the probability that the equity financing option will be preferred? (10 pts)
2. What is the probability that the company will have negative earnings per share under the debt option? (5 pts)