1 Requirements Evaluate the effect the two financing alternatives will have on Henderson's net income and earnings per share two years from now. Complete the memo to Henderson's management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising the funds would you recommend? 1. 2. Print Done 1 More Info The board of directors is considering obtaining the $8.5 million either by borrowing at 8% or by issuing an additional 200,000 shares of common stock. This year the company has earned $5.5 million before interest and taxes and has 200,000 shares of $1-par common stock outstanding. The market price of the company's stock is $42.50 per share. Assume that income before interest and taxes is expected to grow by 10% each year for the next two years. The company's marginal income tax rate is 40% PrintDone Requirement 2. Complete the memo to Henderson's management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising funds would you recommend? To: Management of Henderson Medical Goods Subject: Advantages and disadvantages of borrowing versus issuing stock to raise cash for expansion The advantages and disadvantages of borrowing to raise cash for expansion are as follows: (If a box is not used in the table, leave the box empty, do not select a label.) Advantages Disadvantages The advantages and disadvantages of issuing stock to raise cash for expansion are as follows: (If a box is not used in the table, leave the box empty; do not select a label.) Advantages Disadvantages Dilution of the ownership interests of existing stockholders Increases the financial risk of the company. It avoids the creation of a liability and its related payments It does not change the present ownership of the business Results in a higher earnings per share of common stock. Results in a lower earnings per share of common stock. The method of raising funds that I would recommend depends upon the goal of the company in relation to this plan. if the company is looking to select an expansion plan that results in a higher earnings per share l would recommend | expansion. If the company is looking for a "safe" means of raising cash I would recommend_v - to raise cash for borrowing ssuing stock