Response to the following problem:
Sunrise Developments, Inc., is considering two financing alternatives for a $9,500,000 retail complex. One option is to issue 250,000 shares of common stock at a price of $38 per share. The second option is to borrow $9,500,000 at an interest rate of 6%. The new complex is expected to yield a before-tax return of 10%. The before-tax earnings before considering either financing alternative is $6,250,000. There are 2,000,000 shares of common stock outstanding prior to considering financing alternatives. The tax rate is 20%.
a. Determine the estimated earnings per share impact from the two financing alternatives.
b. Which alternative has the most favorable impact on earnings per share?