Alpha Ltd. is considering building a second plant at a cost of $5,000,000. Management has two alternatives to obtain the funds: (1) sell additional common shares or (2) issue $5,000,000, five-year bonds payable at 10% interest. Management believes that the bonds can be sold at par for $5,000,000 and the shares at $65 per share. The statements (before the new financing) show the following selected information:

Average net income for past several years (net of tax)		430,000
Long-term liabilities	$	1,720,000
Common shares, no par (30,000 shares)		3,440,000
Retained earnings		975,000

The average income tax rate is 30%. Dividends per share have been $8 per share per year. Expected increase in pre-tax income (excluding interest expense) from the new plant is $713,000 per year.

Required:

1. Prepare an analysis to show, for each financing alternative,

a. Expected total net income after the addition. (Indicate amounts to be deducted with minus sign. Round intermediate answers and final answer to nearest whole dollar.)

(a) Sell Shares (b) Issue Bonds

Average income expected

Bond interest expense

Tax saving

Net income estimated

b. After-tax cash flows from the company to prospective owners of the new capital and

(a) Sell Shares(b) Issue Bonds

Dividends

Interest

c. The (leverage) advantage or disadvantage to the present shareholders of issuing the bonds to obtain the financing, as represented by comparing return-on-assets to return-on-equity. (Round your final percentage answers to one decimal place i.e. 0.123 should be considered as 12.3%.)

(a) Sell Shares (b) Issue Bonds

Return on owners equity

Return on total assets