Twin City Printing Is Considering Two Financial Alternatives for Financing

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 P/E under the debt alternative would be 15, and the P/E 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