Early next year, the Strasburg Company plans to raise a net amount of $270 million to finance new equipment and working capital. Two alternatives are being considered: common stock can be sold to net $60 per share, or bonds yielding 12 percent can be issued. The balance sheet and income statement of the Strasburg Company prior to financing are as follows:

Assuming that EBIT is equal to 10 percent of sales, calculate earnings per share under both the debt financing and the stock financing alternatives at each possible level of sales. Then calculate expected earnings per share and EPS under both debt and stock financing. Also, calculate the debt-to-total-assets ratio and the TIE ratio at the expected sales level under each alternative. The old debt will remain outstanding. Which financing method do yourecommend?

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The Strasburg Company Balance Sheet as of December 31 millions) 900.00 450.00 S 172.50 255.00 225.00 652.50 300.00 60.00 337.50 $1,350.00 Current assets Net fixed assets Notes payable to bank Other current liabilities Total current liabilities Long-term debt (10%) Common stock, $3 par Retained earnings Total liabilities and equity Total assets $1,350.00 The Strasburg Company Income Statement for Year Ended December 31 $ millions) Sales Operating costs Earnings before interest and taxes (EBIT) (10%) Interest on short-term debt Interest on long-term debt Earnings before taxes (EBT) Taxes (40%) Net income $ S 2,475.00 2,227.50 S 247.50 15.00) 30.00 $ 202.50 81.00 $ 121.50 The probability distribution for annual sales is as follows: Probability 0.30 0.40 Annual Sales ($ millions) $2,250 2,700 3,150 9