ABC Company is currently financed by $1,500,000 in equity. There is an after tax return of $325,000. Due to customer demand for the company's product, it wants to expand operations by investing another $1,500,00. The expected return on this investment is $500,000 before tax. The cost of debt is 25% before tax and the tax rate is 40%. There is a choice of either financing the expansion of the additional $1,500,000 through debt or equity.
Required:
Calculate the return to shareholders when the investment is
1. Financed through the new equity
2. Financed through debt finance.