Problem:
A firm with earnings before interest and taxes of $500,000 needs $1 million of additional funds. If it issues debt, the bonds will mature after 20 years and pay interest of 8 percent. The firm could issue preferred stock with a dividend rate of 8 percent. The firm has 100,000 shares of common stock outstanding and is in the 30 percent tax bracket.
Required:
What are the (1) earnings per common share under the two alternatives, (2) the times-interest-earned if the firm uses debt financing, and (3) the times-dividend-earned if the firm uses preferred stock financing? Explain in detail and provide step by step solution.