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Question 1: (12 marks) ABC company is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1.
Question 1: (12 marks) ABC company is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1. Issue 100,000 shares of $18 par value common stock. 2. Issue $1,800,000, 10%, 10-year bonds at par. It is estimated that the company will earn $900,000 before interest and taxes because of acquiring the medical equipment. The company has an estimated tax rate of 10% and has 40,000 shares of common stock outstanding prior to the new financing. Required: Determine the effect on net income and EPS for these two methods of financing and describe what is your recommendation to finance the equipment as a financial manager? What is financial leverage and explain its effect? olan
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