Integral Solutions needs $5,000,000 to expand their production capacity and is considering two financing options:

Plan A - Integral can borrow the full $5,000,000 from the bank at 8% interest.

Plan B - Integral can issue 100,000 preferred shares for $50 each. The preferred shares would pay an annual dividend of $3.00 per share.

Required:

a) Assuming that the company has an effective tax rate of 30%, calculate the annual after tax cost (in dollars) of each plan (3 marks)

b) Which plan would you recommend and why? (2 marks)