Suppose that you are Dear FASB, the question-and-answer person for a magazine called Rural Business. Rural Business is a magazine devoted to serving the needs of small and medium sized businesses in rural communities. Readers of your magazine are invited to submit letters to Dear FASB, who offers advice in "Dear Abby" style in a special section of the magazine. Your editors policy is to require revision whenever she believes a nonaccountant would have difficulty understanding a response. One day you receive the following letter:

Dear FASB, Please help me make an important financing decision for my company. I need to raise additional capital to finance an expansion of operations. Two alternatives available are issuing bonds or preferred stock. In either case I need $2,000,000 cash to carry out this next year's capital budget. My underwriter suggests that a $2,000,000 bond issue (a 20-year term) will need to have an interest rate of approximately 9% to sell at face value. This rate seemed high compared to the current prime rate I was quoted (6.25%). She stated that the 9% rate will be needed to compensate investors for the higher risk of the long-term investment and because of the size of my company. The preferred stock alternative would need a stated dividend rate of 7% to sell 20,000 shares of $100 par value cumulative, nonparticipating preferred stock, according to the underwriter. The underwriter said that a dividend rate of 13% would be needed if I wanted to issue noncumulative preferred stock. I have been given no explanation why an additional 6% dividend would be needed. I am unsure of what to do. The bond issue is more attractive to me because I wouldn't have to give up some ownership in the company. However, the preferred stock would cost me less cash outflow each year. Is $40,000 savings in cash outflow sufficient to compensate me for the ownership rights given up? Your expert advice for this decision will be greatly appreciated.

Sincerely, Strapped for Cash

Required: Your task is to write an answer to Strapped for Cash. Because space in your magazine is limited, restrict your answer to 230 words in the body of the response. The document must have reasonable margins and font setting