Q1. David Ding Baseball Bat Company currently has $3 million (3,000,000) in debt outstanding, bearing an interest rate of 12 percent. It wishes to finance a $4 million (4,000,000) expansion program and is considering three alternatives: additional debt at 14percent interest (option 1), preferred stock with a 12 percent dividend (option 2), and the sale of common stock at $16 per share (option 3). The company currently has 800,000 shares of common stock outstanding and is in a 40 percent tax bracket.

i. If earnings before interest and taxes are currently $1.5 million (1,500,000), what would be earnings per share for the three alternatives?

ii. Compute the degree of financial leverage (DFL) for each alternative at the expected EBIT level of $1.5 million.

iii. Which alternative do you prefer?