Sao Luís Corporation is an all equity firm with a total value of $22 million. It requires an additional capital of $7 million, which may be either equity, or debt at the interest rate of 7%. After the new capitalization, the expected EBIT is $6 million, with standard deviation of $2 million. The company pays income tax at 45% rate, and it has 2 million shares outstanding. What is the preferred method of raising new capital, if the objective is to maximize the EPS? What is the probability that you are right in your decision? Show solutions.