FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2017. Two alternatives are being considered common stock may be sold to net $60 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2016 Millions of Dollars) Current assets Net fixed assets $ 900.00Notes payable 255.00 697 50 60.00 337 50 Total liabilities and equity$135000 Long-term debt (10%) 450.00 Common stock, $3 par Retained earnings $1,350.00 Total assets The Severn Company: Income Statement for Year Ended December 31, 2016 Millions of Dollars) Sales Operating costs Earnings before interest and taxes (10%) Interest on short-term debt Interest on long-term debt Eamings before taxes Federal-plusstate taxes (40%) Net income $2,A7500 2227.50 s 247.50 15.00 69.75 162.75 65.10 9765 The probability distribution for annual sales is as follows: Probability Annual Sales (Millions of Dollars) $2,250 0.30 0.40 0.30 2,700 3,150 Assuming that EBIT equals 10% of sales, calculate earnings per shar (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Then calculate expected EPS and EPS under both debt and stock financing alternatives. Also calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. Which financing method do you recommend? [Hint: Notes payable should be included in both the numerator and the denominator of the debt-to-capital ratio.]