WinTech Technology Inc. is evaluating two financing options for its new investment of

$2,500,000.

Option 1: 0% debt

Option 2: 60% debt

Regardless of how the firm is financed, expected sales and costs are as follows:

Sales (units) 22,500 units

Sale price per unit $100.00

Variable cost per unit $ 35.00

Fixed cost $1,000,000

Additional information regarding each option of financing is shown below:

Option1

0% Debt

Option 2

60% Debt

New shares issued at $10 per share 250,000 100,000

Debt, $ $0 $1,500,000

Equity, $ $2,500,000 $1,000,000

Interest rate NA 10.00%

Tax rate 35% 35%

Required return from equity, Ks 9.25% 14.5%

a) Calculate the earnings per share after the expansion under each financing option.

(10 marks)

b) Calculate the estimated share price under each financing option using the zero-growth

model. (4 marks)

c) Which financing option should be chosen? Explain. (1 mark)

N.B. Round to the next $1 and use two decimal places for rates of return.