Sao Paulo Inc. needs $40 million in new capital, which it may acquire by selling bonds at par with coupon 10% or by selling stock at $37 (net) per share. The current capital structure of Sao Paulo consists of $250 million (face value) of 8% coupon bonds selling at 95, and 11 million shares of stock selling at $40 apiece. After the new financing, the EBIT of São Paulo is expected to be $55 million with a standard deviation of $25 million. Which method of financing do you recommend? What is the probability that you are right? Show solutions.