LO 4,6
(Learning Objective 4, 6: Analyze alternative plans for raising money) United Financial Services is considering two plans for raising $800,000 to expand operations. Plan A is to borrow at 10%, and plan B is to issue 200,000 shares of common stock at $4.00 per share. Before any new financing. United has net income of $500,000 and 200,000 shares of common stock outstanding. Assume you own most of United’s existing stock. Management believes the company can use the new funds to earn additional income of $800,000 before interest and taxes. United’s income tax rate is 30%.
Requirements
- 1. Analyze United’s situation to determine which plan will result in higher earnings per share.
- 2. Which plan allows you to retain control of the company? Which plan creates more financial risk for the company? Which plan do you prefer? Why?
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