GameY Inc.has 30 million shares outstanding, with current market price at $2.50 and the company is entirely equity financed. The company plans to purchase a new factory at $10 million and an additional $5 million would be needed to renovate the factory. This purchase is expected to increase the companys annual pretax earnings by $4 million in perpetuity. The companys current cost of capital is 10 percent. The company is deciding which capital structure to be used. Based on some discussions with investment banks, the company can issue bonds at par value with a coupon rate at 6 percent. The company feels that capital structure in the range of 70 percent equity/30 percent debt would be optimal. The company has a 21% corporate tax rate.

a) Suppose The GameY Inc. decides to issue equity to finance the project, what is the price per share of the firms stock?

b) Suppose The GameY Inc. decides to issue debt to finance the project, what is the price per share of the firms stock?

c) Which is better? Debt financing or equity financing?

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