Jones Inc. needs $100,000 to finance the purchase of new equipment. The finance manager is considering two options:

1. Borrowing the funds over a five-year term and paying interest at the rate of 6% per year, or

2. Issuing 6,000 shares of $1 cumulative preferred shares.

The equipment is estimated to have a life of five years and no residual value. Profit before interest expense and tax is expected to be $80,000. The tax rate is assumed to be 25%.

Required

Using the elements of critical thinking described on the inside front cover, respond. Consider the following subheadings to organize your response, and provide calculations with your facts on the different costs to borrow versus issue preferred shares.

(h) Employee share purchase plan

The Corporation has an employee share purchase plan (ESPP), whereby the Corporation matches the contributions made by employees. Under the terms of the ESPP, employees may, dependent on their employment agreement, contribute up to a maximum of 10%, 15% or 20% of their gross salary to acquire voting shares of the Corporation at the current fair market value. The contributions are matched by the Corporation and are required to be held within the ESPP for a period of one year.

Employees may offer to sell ESPP shares, which have not been held for at least one year, to the Corporation, at a purchase price equal to 50% of the weighted average trading price of the Corporation’s voting shares for the five trading days immediately preceding the employee’s notice to the Corporation, to a maximum of four times per year.

12. Dividends

During the year ended December 31, 2017, the Corporation’s Board of Directors declared quarterly cash dividends of $0.14 per common voting share and variable voting share. For the year ended December 31, 2017, the Corporation paid dividends totaling $64,886 (2016 – $66,967).

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• Conclusions