Twin City Publishing is considering two financial alternatives for financing a major expansion program. Under either alternative EBIT is expected to be $15.6 million.

Currently, the firm's capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds.

Under the debt financing alternative $10 million in 12%, long-term bonds will be sold and under the equity financing alternative, the firm would sell 500,000 shares of common stock.

The P/E (Price-earnings ratio) under the debt alternative would be 15 and the P/E under the equity alternative would be 16. The firm's tax rate is 40%.

Required: Which alternative would the firm choose? Show your workings and explain your findings.