Second Company's preferred stock is 8%, cumulative. A provision of the stock agreement specifies that the stock must be redeemed at face value in five years.

Required

1. It appears that the loan payable of First Company and the preferred stock of Second Company are very similar. What are the differences between the two securities?
2. When calculating the debt-to-equity ratio, do you believe that the Second Company preferred stock should be treated as debt or as stockholders' equity? Write a statement expressing your position on the issue.

Part 2:

Rohnan Inc. needs to raise $500,000. It is considering two options:

1. Issue preferred stock, $100 par, 8%, cumulative, nonparticipating, callable at $110. The stock could be issued at par.
2. Issue common stock, $1 par, market $10. Currently, the company has 400,000 shares outstanding distributed equally in the hands of five owners. The company has never paid a dividend.

Required

1. Rohnan has asked you to consider both options and make a recommendation. It is equally concerned with cash flow and company control. Write your recommendations.