Falcon Air Conditioner (FAC) has $1 million in EBIT for year ended 2020 with the following balance sheet:

Balance Sheet As of December 31, 2020

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Assets Liabilities & Capital

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Current assets $2,000,000 Debt(@ 8%) $1,250,000

Net fixed assets 4,250,000 Common stock; $5 par 2,000,000

Preferred stock (@ 10%) 2,000,000

Retained earnings 1,000,000

Total Assets $6,250,000 Total Liabilities & Capital $6,250,000

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FAC expects that the existing debt and preferred stock will not be retired until the year 2023; hence they will remain in the same amount next year. FAC is expected to maintain its dividend payout ratio on common stock at the level of 10% next year. FACs corporate tax rate is 40%.

FAC plans to undertake an expansion project, which is expected to increase EBIT to $1.4 million in 2021 (an increase of $400,000 from the year 2020 EBIT). It needs $600,000 of external capital to finance the expansion, and it is considering the following three long-term financing alternatives:

1. New bank term loan, with an interest rate of 10%; its sinking fund provision requires the loan to be fully amortized over the next 5 years, commencing in 2022.

2. New preferred stock, with a dividend rate of 12%.

3. 60,000 shares of new common stock to net the firm $10 per share.

(13 pts) (a) Given the information above, compute the EPS under each alternative for the year 2021 using the following table (you dont have to fill up all cells).

Items	DEBT	PREFERRED STOCK	COMMON STOCK
EBIT
EPS

(4 pts) (b) In this process of evaluating long-term financing choices, what other factors would FAC need to consider? Explain briefly.