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MFW Co is considering a $1,000,000 expansion of its business. They are considering either a loan in the form of 7% bonds or issuing 400,000 equity shares at $2.50 to raise the same amount of funds. The expansion will generate $500,000 of extra operating profit each year. Assume tax of 25%. Ratios currently stand as follows:
Which one of the following is correct? A. Interest cover is reduced using either source of finance. B. Equity reduces gearing and gives the best earnings per share. C. Earnings per share and interest cover both worsen using debt. D. Earnings per share are increased most by using debt. |