COMMON AND PREFERRED STOCK. Expansion Company now has

$2,500,000 of equity (100,000 common shares). Current income is $400,000 and Expansion Company needs $500,000 of additional capital. The firm’s bankers insist that this capital be acquired by selling either common or preferred stock. If Expansion sells common stock, the ownership share of the current stockholders will be diluted by 16.7%

(20,000 more shares will be sold). If preferred stock is sold, the dividend rate will be 15% of the $500,000. Furthermore, the preferred stock will have to be cumulative, participating, and convertible into 20,000 shares of common.

REQUIRED:

Indicate whether Expansion should sell additional common or preferred stock, and explain the reasons for your choice.