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 at $4.00 per share.
Before any new financing, United has net income of $500,000 and 200,000 shares of 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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