Assume that Eventbrite decides to launch a new website to market discount bookkeeping services to consumers. This chain, called Aladin, requires $$500,000$ of startup capital. The founder contributes $$375,000$ of personal assets in return for $15,000$ shares of common stock, but must raise another $$125,000$ in cash. There are two options for raising the additional cash:

Sell $3,000$ shares of common stock to one or more investors for $$125,000$ cash.

Sell $1,250$ shares of cumulative preferred stock to one or more investors for $$125,000$cash. The preferred stock will have a par value of $$100,$ have an annual dividend rate of $8\%$ and be issues at par.

IF the new business is expected to earn $$72,000$ of after$-$tax income in the first year, what rate of return on beginning equity will the founder earn under each alternative? Which plan will provide the higher expected return?

If the new business is expected to earn $$16,800$ of after$-$tax income in the first year, what rate of return on the beginning equity will the founder earn under each alternative. Which plan will provide the higher expected return?

Interpret the difference between the two plans