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Step 1: Compute the EPS and ROE for both options (8 points total, 1 each number) Option 1 Equity: Issue 85,000 common shares with a
Step 1: Compute the EPS and ROE for both options (8 points total, 1 each number) Option 1 Equity: Issue 85,000 common shares with a current market price of $15 each. Option 2 Debt: Take on $1,275,000 of debt with a 4.5% interest and $181,000 principle payments annually Given info before new funding Current debt outstanding is $1,420,000 with 5% interest and $175,000 principle payments annually Current equity is $1,425,000 with 78,000 common shares and $0.50 dividend per share annually Tax rate 20% Assume EBIT in a bad economy is $252,000 and EBIT in a great economy is $1,452,000
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