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Totally Awesome is a major chain of ladies fashion stores. They are considering expanding the business by setting up another outlet in a new shopping centre. The estimated cost of this venture is $5,448,600. The expected profit (before interest and taxes) from this additional outlet is $972,300 per year. Totally Awesome has 216,100 common shares with total shareholders' equity of $4.322,000. The board is considering two alternatives to finance the expansion: 1. Issue 201.800 common shares for $27 per share, or 2. Issue $5,448,600 of 5% bonds payable. Totally Awesome is subject to a 30% tax rate. Complete the following table to illustrate the effects on earning per share and return on equity for the two alternatives. (Round Earning per share and Return on equity to 2 decimal places, eg. 52.75 or 52.75%.) Issues Equity Issues Bonds Profit before interest and income tax Less: interest expense Profit before income tax Income tax expense Profit Number of shares $ LA $ Shareholders' equity $ S nings per share Shareholders' equity -11 $ $ Earnings per share $ $ Return on equity % % e Textbook and Media Question Part Score --/0.6 Below are listed some advantages of either debt financing or equity financing. For each advantage, identify if it relates to debt financing or equity financing, by selecting the appropriate word in the box to the right of the statement Debt or Equity Financing Creates the opportunity for financial leveraging. Earnning per share is often higher. Debt or Equity Financing Creates the opportunity for financial leveraging. Earnning per share is often higher. Return on equity may be higher. > Shareholders' can keep full control of the company. There is no requirement to repay the investment

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