19. Company B is currently financed by common stock equity. It is considering two alternative ways of financing in order to increase the return on common equity Table 7.28 lists the two options under consideration, along with the base case. 2009 22 0 1 2 TABLE 7.27 Financial Data of Company A (Millions of Dollars) 2014 2013 2012 2011 Net income 41 33 34 35 Preferred dividends 3 3 3 1 Common dividends 18 18 18 18 Total assets 492 455 417 403 68 57 75 68 Long-term liabilities 113 114 75 83 Preferred stock ($100 par) 82 82 82 82 Common stocks ($6.25 par) 45 45 45 45 Capital surplus 6 0 0 0 Retained earnings 177 157 140 126 CLS 2010 27 0 13 280 51 57 0 38 34 100 57 0 38 86 TABLE 7.28 Financing Options of Company B Base Case ($) 30,000,000 30,000,000 Option A (S) 30,000,000 6,000,000 24,000,000 Option B (S) 30,000,000 6,000,000 Capitalization Common stock equity Preferred stock equity Long-term debt EBIT (operating income) 24,000,000 3,000,000 3,000,000 3,000,000 The company's capitalization and EBIT remain constant at $30 million and $3 million, respectively. The composition of the capitalization changes from 100% common stock equity (base case) to a mix of common and preferred stocks (Option A) and to a mix of common stock and long-term debt (Option B). The corporate tax rate is 40%. Dividends of preferred stocks are paid at a 5% rate. The interest charge for the long-term debt is 4%. a. Compute the rate of return on common stock equity for the three cases. Explain why these numbers change from one case to another. b. Compute the rate of return on capitalization for the three cases. c. Among the three cases indicated, which financing option is to be preferred by the company, and why