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Mother Earth Inc. (MEI) was started three years ago by two friends who recently graduated from Blue Rock College. MEI, a multimillion-dollar distributor of
Mother Earth Inc. (MEI) was started three years ago by two friends who recently graduated from Blue Rock College. MEI, a multimillion-dollar distributor of environmentally friendly products, currently sells products made by other manufacturers. The management team is now considering the purchase of the manufacturer of MEI's bestselling product. The acquisition is expected to cost $12,000,000, but MEI's chief financial officer (CFO) is unclear as to whether the purchase should be financed using debt or equity funds. MEI's current capital structure consists of 1,000,000 shares of common stock and a $4 million term loan. The interest rate on the loan is 4%, and MEI's tax rate is 40%. The two financing alternatives are: Plan 1-Common equity financing: Sell an additional 750,000 shares at $16 per share. Plan 2-Debt financing: Secure $12,000,000 through a four-year 9% term loan. MEI's current earnings before interest and taxes (EBIT) is $15,000,000, and is expected to increase to $20,000,000. Given MEI's current situation and acquisition plans, complete the following table:
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