Twin City Printing Is Considering Two Financial Alternatives for Financing

question 41

Multiple Choice

Twin City Printing is considering two financial alternatives for financing a major expansion program.Under either alternative EBIT is expected to be $15.6 million.Currently the firm's capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds.Under the debt financing alternative $10 million in 12% long­ term bonds will be sold and under the equity financing alternative the firm would sell 500,000 shares of common stock.The PIE under the debt alternative would be 15 and the PIE under the equity alternative would be 16.The firm's marginal tax rate is 40%.Which alternative would produce the higher stock price?

• A)debt-stock price of $23.70
• B)debt-stock price of $32.29
• C)equity-stock price of $25.12
• D)equity-stock price of $33.28

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Definitions:

Cash Outflows

Money that exits a business or an individual's account, typically for payments or purchases.

Cash Inflows

The total amount of money being transferred into a business, typically from operational, investing, and financing activities.

Control Costs

The process of monitoring and managing expenses to adhere to a budget and maximize efficiency.

Managers' Performance

The evaluation of how effectively managers achieve objectives, manage resources, and lead teams, often impacting company success and efficiency.