The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2022. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 9% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows:

Assuming that EBIT equals 15% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Then calculate expected EPS and σ_EPS under both debt and stock financing alternatives. Also calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. Which financing method do you recommend?

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The Severn Company: Balance Sheet as of December 31, 2021 (millions of dollars) $ 900.00 Notes payable 450.00 Current assets Net fixed assets Total assets $1,350.00 $ 255.00 Long-term debt (7%) 697.50 Common stock, $1 par 60.00 Retained earnings 337.50 Total liabilities and equity $1,350.00 The Severn Company: Income Statement for Year Ended December 31, 2021 (millions of dollars) Sales Operating costs Earnings before interest and taxes (15%) Interest on short-term debt Interest on long-term debt Earnings before taxes Federal-plus-state taxes (25%) Net income $2,475.00 2,103.75 $ 371.25 10.50 48.83 $ 311.92 77.98 $ 233.94