Reference no: EM132757821

Weightwatchers Inc. is considering two financial alternatives for financing a major expansion programme. Under either alternative, EBIT is expected to be $12.5 million. Currently the firm's capital structure consists of 2 million shares of common stock and $15 million in 6% long-term bonds. Under the debt financing alternative, $8 million in 4% long-term bonds will be sold and under the equity financing alternative, the firm would sell 150,000 shares of common stock. The price earning ration (P/E) under the debt alternative would be 21 and the P/E under the equity alternative would be 22. The firm's marginal tax rate is 40%. Which alternative would produce the higher stock price?