Case 2. (Learning Objective 4: Analyzing alternative ways of raising $6 million) Business is going well for Park ’N Fly, the company that operates remote parking lots near major airports. The board of directors of this family-owned company believes that Park ’N Fly could earn an additional $1.5 million income before interest and taxes by expanding into new markets. However, the $6 million that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must consider issuing securities to outsiders. The directors are considering three financing plans.

Plan A is to borrow at 6%. Plan B is to issue 100,000 shares of share capital. Plan C is to issue 100,000 shares of non-voting, $3.75 preference shares ($3.75 is the annual dividend paid on each share of preference shares). Park ’N Fly presently has net income of

$3.5 million and 1 million shares of share capital outstanding. The company’s income tax rate is 35%.

Requirements 1. Prepare an analysis to determine which plan will result in the highest earnings per share of share capital.

2. Recommend a plan to the board of directors. Give your reasons.