Problem $2(15$ Marks$)$

ADA lnc$,$ an all$-$equity firm, needs $$6,000,000$ to finance new equipenent. Firm currently ban $250,000$ common shares cetstanding and its tax rate is $35\%.$ The firm is considering the following two mutually exclusive options to finance the new equipment.

Option I. Raise the required funds by selling bonds with a $12\%$ coupon rate.

Option II$.$ Raise $$4,000,000$ by isswing $200,000$ shares of common stock and remaining $$2,000,000$ by issaing preferred stock at $5\%$ dividend.

a$)$ What level of EBIT would yield the same PRS for options I and II$?(6$ Marks $)$

b$)$ What EPS corresponds to this level of EBIT calculated in part a$?(2$ Marks$)$

c$)$ If you expect the EBIT to be $$2\mathrm{.}5$ million, which option would you recommend for the expected EBIT level? $(3$ Marks$)$

d$)$ If you learn that after expansion there is a $50\%$ probability of EBIT being $$3$ reillion, a $50\%$ probability of it being $$1$ million, which option would you recommend for the expocted EBIT level? $(4$ Marks$)$