DEBT AND EQUITY

The Simla Corporation is considering how to finance its latest project, construction of a new fertilizer plant. The plant is expected to cost $$3$ million dollars, and it will generate $$700,000$ each year of its five year expected life.

The options for financing are either to issue bonds $($debt$)$ or issue additional stock $($equity$).$ The current interest rate for bond financing is $8\%,$ and the company would have little trouble finding institutions eager to buy such bonds. To raise $$3$ million in the equity market would require the sale of $30,000$ additional shares of common stock. Currently, there are only $100,000$ shares outstanding, mostly held by the Simla family.

In addition to the income from the proposed plant, the Simla Corporation foresees other pretax earnings of $$800,000$ per year for the next five years. The tax rate for the corporation is $40\%.$

Please advise Seymour Fish, the V$.$ P$.$ finance for the Simla Corporation, which alternative is financially preferable. What other considerations, other than financial, may go into the decision on which option to choose.