Evan is deciding to expand its operations and requires an additional $1,000,000. There are two possibilities of raising the necessary finance: issuing $1.00 shares or 7% debentures redeemable in five years. Currently Evan does not use any external debt but has issued 250,000 $1.00 shares. It is expected that the earnings before interest and tax will increase to $650,000 per year.

1. Advise management which methods of finance is preferred using the EPS method.

1. Advise management in which situations the use of equity is preferred.

1. Calculate the change in financial leverage as a result of the issue of the debentures.

1. Calculate the times interest coverage before and after the issue of the debentures.

1. Advise Evan of the problem it faces as gearing increases.