United Financial Services is considering two plans for raising $800,000 to expand operations. Plan A is to

Question:

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?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...

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