Over the Hill Savings has been told by examiners that it needs to raise an additional $8 million in long-term capital. Its outstanding common equity shares total 5.4 million, each bearing a par value of $1. This thrift institution currently holds assets of nearly $2 billion, with $135 million in equity. During the coming year, the thrift€™s economist has forecast operating revenues of $180 million, of which operating expenses are $25 million plus 70% of operating revenues.
Among the options for raising capital considered by management are (a) selling $8 million in common stock, or 320,000 shares at $25 per share; (b) selling $8 million in preferred stock bearing a 9 percent annual dividend yield at $12 per share; or (c) selling $8 million in 10-year capital notes with a 10 percent coupon rate. Which option would be of most benefit to the stockholders? (Assume a 34% tax rate.) What happens if operating revenues are more than expected ($225 million rather than $180 million)? What happens if there is a slower-than-expected volume of revenues (only $110 million instead of $180 million)? Pleaseexplain.

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Sale of Common Stock at $25 per share Sale of 9% Preferred Stock at $12 per share Sale of 10% Capital Not es $180,000,000 $180,000,000 $180,000,000 Estimated operating revenues Estimated operating expenses $151,000,000 $151,000,000 $151,000,000 Net revenues $29,000,000 $29,000,000 $29,000,000 Interest expense on capital notes $800,000 Before-tax income $29,000,000 $29,000,000 $28,200,000 Estimated income taxes $9,860,000 $9,860,000 $9,588,000 $19,140,000 $19,140,000 $720,000 After-tax income $18,612,000 Preferred stock dividends Net income for common stockholders $19,140,000 $18,420,000 $18,612,000 Shares of common stock outstanding 5,720,000 5,400,000 5,400,000 Earnings per share of common stock $3.35 $3.41 $3.45