Assume that Julz Chavez’s launch of Get Real Girl requires $312,500 of start-up cap¬

ital. Chavez contributes $250,000 of personal assets in return for 5,000 shares of common stock but needs to raise another $62,500 in cash. There are two alternative plans for raising the additional cash.

Plan A is to sell 1,250 shares of common stock to one or more investors for $62,500 cash. Plan B is to sell 625 shares of cumulative preferred stock to one or more investors for $62,500 cash (this pre¬

ferred stock would have a $100 par value, an annual 8% dividend rate, and be issued at par).

1. If the business is expected to earn $45,000 of after-tax net income in the first year, what rate of return on beginning equity will Chavez personally earn under each alternative? Which plan will provide the higher expected return to Chavez?

2. If the business is expected to earn $10,500 of after-tax net income in the first year, what rate of return on beginning equity will Chavez personally earn under each alternative? Which plan will provide the higher expected return to Chavez?

3. Analyze and interpret the differences between the results for parts 1 and 2