The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2022. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 11% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows:

The Severn Company: Balance Sheet as of December 31, 2021 (millions of dollars)
Current assets	$ 900.00		Notes payable	$ 255.00
Net fixed assets	450.00		Long-term debt (7%)	705.00
			Common stock, $1 par	60.00
			Retained earnings	330.00
Total assets	$1,350.00		Total liabilities and equity	$1,350.00

The Severn Company: Income Statement for Year Ended December 31, 2021 (millions of dollars)
Sales	$2,475.00
Operating costs	2,103.75
Earnings before interest and taxes (15%)	$ 371.25
Interest on short-term debt	16.50
Interest on long-term debt	49.35
Earnings before taxes	$ 305.40
Federal-plus-state taxes (25%)	76.35
Net income	$ 229.05

The probability distribution for annual sales is as follows:

Probability		Annual Sales (millions of dollars)
0.30		$2,250
0.40		2,700
0.30		3,150

Assuming that EBIT equals 15% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Write out your answer completely. For example, 0.00013 million should be entered as 130. Do not round intermediate calculations. Round your answers to the nearest cent.

Annual Sales (millions of dollars)		EPS under the debt financing		EPS under the stock financing
$2,250		$		$
2,700
3,150

Calculate expected EPS under both debt and stock financing alternatives. Write out your answer completely. For example, 0.00013 million should be entered as 130. Do not round intermediate calculations. Round your answers to the nearest cent.

Expected EPS under the debt financing: $

Expected EPS under the stock financing: $

Calculate _EPS under both debt and stock financing alternatives. Write out your answer completely. For example, 0.00013 million should be entered as 130. Do not round intermediate calculations. Round your answers to the nearest cent.

_EPS under the debt financing: $

_EPS under the stock financing: $

Calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. (Hint: Notes payable should be included in both the numerator and the denominator of the debt-to-capital ratio.) Do not round intermediate calculations. Round your answers to two decimal places.

Under the debt financing:

The debt ratio: %

Times-interest-earned ratio:

Under the stock financing:

The debt ratio: %

Times-interest-earned ratio:

Which financing method do you recommend?

debt or equity