You are CEO of ahigh-growth technology firm.You plan to raise $100 million to fund a planned expansion by issuing either new shares or new debt. With theexpansion, you expect earnings next year of $30 million. The firm currently has 16 million sharesoutstanding, with a price of $86 per share. Assume perfect capital markets.

a. If you raise the $100 million by selling newshares, what will the forecast for nextyear's earnings per sharebe?

b. If you raise the $100 million by issuing new debt with an interest rate of 3%, what will the forecast for nextyear's earnings per sharebe?

c. What is thefirm's forwardP/E ratio(that is, the share price divided by the expected earnings for the comingyear) if it issuesequity? What is thefirm's forwardP/E ratio if it issuesdebt? How can you explain thedifference?

a. If you raise the $100 million by selling newshares, what will the forecast for nextyear's earnings per sharebe?

If you raise the $100 million by selling newshares, nextyear's EPS will be $

nothing

per share. (Round to the nearestcent.)

b. If you raise the $100 million by issuing new debt with an interest rate of 3%, what will the forecast for nextyear's earnings per sharebe?

If you raise the $100 million by issuing new debt with an interest rate of 3%, the new EPS will be $

nothing

. (Round to the nearestcent.)

c. What is thefirm's forwardP/E ratio(that is, the share price divided by the expected earnings for the comingyear) if it issuesequity? What is thefirm's forwardP/E ratio if it issuesdebt? How can you explain thedifference?

What is thefirm's forwardP/E ratio if it issuesequity? What is thefirm's forwardP/E ratio if it issuesdebt?

Ratio

ForwardP/E ratio for equity

nothing

(Round to the nearestinteger.)

ForwardP/E ratio for debt

nothing

(Round to the nearestinteger.)

How can you explain thedifference? (Select the best choicebelow.)

A.

The higherP/E ratio is justified because withleverage, EPS will grow at a faster rate.

B.

The lowerP/E ratio is justified because withleverage, the EPS will decrease at a faster rate.

C.

The lowerP/E ratio is justified because withleverage, EPS will grow at a faster rate.

D.

The higherP/E ratio is justified because withleverage, the EPS will decrease at a faster rate.