Watson Metal Products is planning to expand its operations to France in response to increased demand from the French for quality metal products to use in production processes. Ben Watson, president of Watson Metal Products, and his consultants have estimated that the expansion will require an investment of $5 million. They have also estimated that this expan¬ sion will cause net income before interest expense to increase by $1,500,000. The company is considering financing the expansion through one of the following alternatives. Alternative 1: Alternative 2: Alternative 3: Issue 200,000 shares of common stock for $25 per share. Issue long-term debt at an annual interest cost of 15 percent. The principal would be payable in ten years. Issue 100,000 shares of common stock for $25 per share and finance the remainder by issuing long-term debt at an annual interest rate of 15 percent. The principal would be payable in ten years. The income statement for the year ended December 31, 1997, of Watson Metal Products was as follows: Sales $ 150,000,000 Cost of goods sold 90,000,000 Other expenses 45,000,000 Income from operations $ 15,000,000 Interest expense 4,000,000 Net income before taxes $ 11,000,000 Income taxes 4,400,000 Net income $ 6,600,000 Earnings per share $3.30 Prior to the expansion, the total debt of Watson Metal Products was $35 million, and total stockholders’ equity was $45 million. There were no changes in total debt and total stockholders’ equity other than those due to net income and the expansion project. Federal and state income tax rates total 40%. REQUIRED:

a. Assume that the company’s net income from non-French operations in 1998 equals the income earned in 1997 and that the estimated income from operations on the expansion is realized in 1998. Compute earnings per share, return on equity, return on assets, financial leverage, and the debt/equity ratios as of December 31, 1998, if the company finances the expansion through the following: (1) Alternative 1 (2) Alternative 2 (3) Alternative 3 Assume that the December 31, 1998, balances equal average balances during 1998.

b. Assume that you are currently a stockholder in Watson Metal Products. Which expansion alternative would you prefer? Explain your answer.

c. What amount of net income would Watson Metal Products have to generate from the expansion project so that earnings per share would be the same before and after the expan¬ sion under each alternative?