Twin City Publishing is considering two financial alternatives for financing a major expansion program. Under either alternative EBIT is expected to be $$15\mathrm{.}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.