INLAND EMPIRE STEEL Inland Empire Steel (IES) is planning an expansion program. It estimates that it will need to raise an additional $200 million. IES discussed with its investment bankers whether to raise the $200 million through debt financing or through equity financing. The banker's recommendation was based on the following background information. The dividend payout has averaged about 50 percent. The cost of debt is 10 percent, and the cost of equity is 14 percent If additional funds are raised by debt, the cost of debt will be 12 percent and the cost of equity will rise to 16 percent. If the additional funds are raised by equity, the cost of debt will remain at 10 percent and the cost of equity will fall to 12 percent. Equity will be sold at $9 per share Steel Industry standards and IES's balance sheet and income statement are given below: STEEL INDUSTRY STANDARDS Long-term debt to equity 30% Common equity to total assets = 55% Fixed charge coverage = 7 times Current ratio = 2.1 Return on net worth = 11% Inland Empire Steel Balance Sheet as of December 200X Scan_90.pdf X O 1 / 1 135% LA Assets Total current assets Net fixed assets $ 600 1,200 Liabilities Total current liabilities Long-term debt (10%) Other liabilities Total debt Common Stock (par $1) Paid-in capital Retained earrings Total claims on assets $ 200 500 300 $1,000 100 300 400 $1,800 Total Assets $1,800 Inland Empire Steel Income Statement as of December 200X Current Year Total revenue $2,000 Net operating income 231 Inrterest expense 60 EBT $ 171 Taxes (25%) 43 EAT $ 128 With Expansion $2,400 260 Required: Recommend the best form of financing for Inland