Gearing Manufacturing Inc is planning a 1 000 000

expansion
Gearing Manufacturing, Inc., is planning a $1,000,000 expansion of its production facilities. The
expansion could be financed by the sale of $1,250,000 in 8 percent notes or by the sale of
$1,250,000 in capital stock, which would raise the number of shares outstanding from 50,000 to
75,000. Gearing pays income taxes at a rate of 30 percent.Required:1. Suppose that income
from operations is expected to be $550,000 per year for the duration of the proposed debt
issue. Should Gearing finance with notes or stock? Explain your answer.2. Suppose that
income from operations is expected to be $275,000 per year for the duration of the proposed
debt issue. Should Gearing finance with notes or stock? Explain your answer.3. Suppose that
income from operations varies from year to year but is expected to be above $300,000, 40
percent of the time and below $300,000, 60 percent of the time. Should Gearing finance with
notes or stock? Explain your answer.4. As an investor, how would you use accounting
information to evaluate the risk of excessive use of leverage? What additional information would
be useful? Explain.View Solution:
Gearing Manufacturing Inc is planning a 1 000 000 expansion
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