Liquid Shipping Inc

Multiple Choice

Liquid Shipping Inc. has developed the following data to help in a decision on whether to issue $40 million in bonds or common shares. If bonds are issued the following projections are made: ROE is 19%, EPS is $2.50, Times interest earned is 3, and the leverage ratio is 40%. If shares are issued, ROE is 11%, EPS is $1.30, Times interest earned is 5, and the leverage ratio is 22%. What is the best conclusion to make concerning this data?

A) The company should issue some bonds and some shares because the returns are large enough to outweigh the risk.
B) The company should issue shares because the returns are large enough to outweigh the risk.
C) The company should issue bonds because the returns are large enough to outweigh the risk.
D) The company should not issue bonds because the returns are too small to outweigh the risk.
E) The company should issue neither bonds nor shares because the returns are too small to outweigh the risk.