Reference no: EM13373243

Designers could earn additional $1,000,000 income before interest and taxes by expanding into new markets. However, the 4,000,000 the business needs for growth cannot be raised. The directors strongly believe to keep it in the family. They are considering the following plans:

Plan A: is to borrow at 6%.

Plan B: is to issue 100,000 shares of common stock.

Plan C: is to issue 100,000 shares of nonvoting, $2.50 preferred stock.

Designers currently have a net income of $1,200,000 and 400,000 shares of common stock outstanding. The company tax rate is 40%.

Prepare an analysis and determine which plan will result in the higher earnings per share of common stock. Recommend one plan to the board. Give reasons