Early in the 2020, Baladna Co. prepared an expansion plan. The plan requires an increase in in both property, plant and equipment and inventory by $190,000,000 and $10,000,000 respectively. The following three alternative financing plans have been suggested by the firms investment bankers:

Plan I: issue preferred stock at par.

Plan II: issue common stock at $10 per share.

Plan III: issue a 16% long-term bonds, due in 20 years, at par ($1,000).

Which financing alternative costs Baladna Co. less: bonds payable or preferred stock? Why? (show computations).

BALADNA CO.

Balance Sheet as of December 31, 2019 (in thousands)

Assets

Current assets:

Cash $ 50,000

Accounts receivable 60,000

Inventory 106,000

Total current assets $216,000

Property, plant, and equipment $504,000

Less: Accumulated depreciation 140,000 364,000

Patents and other intangible assets 20,000

Total assets $600,000

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable $ 46,000

Taxes payable 15,000

Other current liabilities 32,000

Total current liabilities $ 93,000

Long-term debt 100,000

Stockholders equity:

Preferred stock ($100 par, 10% cumulative, 500,000 shares

authorized and issued) 50,000

Common stock ($1 par, 200,000,000 shares authorized,

100,000,000 issued) 100,000

Premium on common stock 120,000

Retained earnings 137,000

Total liabilities and stockholders equity $600,000