The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2013. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows:

The probability distribution for annual sales is as follows:
Annual Sales
(Millions of
Probability....................Dollars)
0.30............................$2,250
0.40..............................2,700
0.30..............................3,150
Assuming that EBIT equals 10% 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 σEPS 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? [Payable should be included in both the numerator and the denominator of the debt-to-capital ratio.]

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The Severn Company: Balance Sheet as of December 31, 2012 (Millions of Dollars) S 255.00 697.50 60.00 337.50 Total liabiliies and equity $135000 The Severn Company: Income Statement for Year Ended December 31, 2012 S 900.00 450.00 Notes payable Long-term debt (10%6) Common stock, $3 par Retained eamings Current assets Net fixed assets Total assets $1350.00 (Millions of Dollars) Sales Operating costs Earnings before interest and taxes (10%) Interest on short-term debt Interest on long-term debt Earnings before taxes Federal-plus-state taxes (40%) Net income $2,475.00 2,227.50 247.50 15.00 69.75 S 162.75