Jason is considering how to fund a new project that management has recently approved. He assesses a number of options available to him, and has come up with 4 plans.

1) He can issue new stock,

2) he can issue 5 year, 7% coupon bonds,

3) he can issue convertible bonds which pay 6% coupons and can be converted to 15 shares of the firms stock (current share price= $45),

4) he can issue a callable bond, 6% coupon, with call price of $1050.

Assume investors demand a return of 7% for all 3 bond types and a return of 14.5% for equity. The firm pays 30% taxes.

Discuss the pros and cons of each payment method as it relates to both the firm and the investor.