The senior management team of your firm is investigating the financial implications of a change to the company's capital structure. The firm currently uses a combination of long-term debt and internal common equity to finance its new asset requirements. Senior management, concerned about economic events that may make borrowing difficult to obtain, is considering two options for Q7. First, borrow $12.5 million in ten-year bonds at a cost of 7.0%. Alternatively, issue an additional 2,000,000 shares of new common stock and $500,000 of 2 year debt.

Table

Debt Com. Eq. Abs Change % Change
Weight of debt 45% 23% 22% (49%)
Weight of Equity 55% 77% 22% 40%
WACC (annual) 27.42% 31.65% 4.23% 15.43%
Avail. to Common $406,623 $1,030,644 $624,021 153.46%
ROE(annual) 5.54% 10.09% 4.55% 82.04%
ROA(annual) 3.07% 7.81% 4.74% 154.54%
EPS $0.24 $0.28 $0.04 16.67%

MV for Q7 $13.69Million $24.05Mill $10.36Mill 76%

What is your recommendation to the senior management team regarding the firm's capital structure? 

What is the reason you recommend it?