Designers could earn additional $1,000,000 income before interest and taxes by expanding into new markets. However, the 4,000,000 the business needs for growth cannot be raised. The director strongly believe to keep it in the family. Thay are considering the following plans:
Plan A: is to barrow at 6%. Plan B: is to issue 100,000 shares of common stock. Plan C: is to issue 100,000 shares of nonvoting, $2.50 preferred stock. Designers currently has a net income of $1,200,000 and 400,000 shares of commen stock outstanding. The company tax rate is 40%.
Prepare an analysis and determine which plan will result in the higher earnings per share of common stock.
Recommend one plan to the board. Give reason.