ABC Investments Inc. is currently managing a capital structure that includes a $$3\mathrm{.}5$ million debt

with an interest rate of $12\mathrm{.}3\%.$ The company is planning a $$5$ million expansion initiative and is

evaluating five financing alternatives:

The preferred stock carries a $12\%$ dividend rate, and the common stock is priced at $$18$ per

share. Currently, the company has $750,000$ shares of common stock outstanding and operates in

a $40\%$ tax bracket.

a$.$ If the earnings before interest and taxes are $$1\mathrm{.}5$ million, what would be earning per share for

five alternatives, assuming no immediate increase in the operating profit.

b$.$ Compute the degree of financial leverage $($DFL$)$ for each alternatives at the expected EBIT level

of $$1\mathrm{.}5$ million.

c$.$ Which alternative do you prefer and why?