Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report:

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• Lower net income and lower income taxes expense than if it issues capital stock.

• Higher net income and higher income taxes expense than if it issues capital stock.

• Lower net income and higher income taxes expense than if it issues capital stock.

• Higher net income and lower income taxes expense than if it issues capital stock.