Reference no: EM132695411

Evan is deciding to expand its operations and requires an additional $1,000,000. There are two possibilities of raising the necessary finance: issuing $1.00 shares or 7% debentures redeemable in five years. Currently Evan does not use any external debt but has issued 250,000 $1.00 shares. It is expected that the earnings before interest and tax will increase to $650,000 per year.

Question 1: Advise management which methods of finance is preferred using the EPS method.

Question 2: Advise management in which situations the use of equity is preferred.

Question 3: Calculate the change in financial leverage as a result of the issue of the debentures.

Question 4: Calculate the times interest coverage before and after the issue of the debentures.

Question 5: Advise Evan of the problem it faces as gearing increases.