=+SA 14-4 Preferred stock vs.

bonds You hold a 25% common stock interest in the family-owned business, a vending machine company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of $7,500,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows:

Plan 1. Issue $7,500,000 of 10-year, 8% notes at face amount.

Plan 2. Issue an additional 100,000 shares of $10 par common stock at $40 per share, and $3,500,000 of 10-year, 8% notes at face amount.

The balance sheet as of the end of the previous fiscal year is as follows:

Thacker, Inc.

Balance Sheet December 31, 2010 Assets Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000,000 Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 ___________ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000,000 ___________ ___________ Liabilities and Stockholders’ Equity Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000 Common stock, $5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,900,000 ___________ Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000,000 ___________ ___________