Reference no: EM13500510

Assume that Kelly Giard of Clean Air Lawn Care decides to launch a new retail chain to market electrical mowers.This chain, named Mow Green, requires $500,000 of start-up capital.Kelly contributes $375,000 of personal assets in return for 15,000 shares of common stock, but he must raise another $125000 in cash.There are two alternatives plans for raising the additional cash.Plan A is to sell 3,750 shares of common stock to one or more investors for $125,000 cash.Plan B is to sell 1,250 shares of cumulative preferred stock to one or more investors for $125,000 cash (this preferred stock would have a $100 par value, an annual 8% dividend rate and be issued at par)

1.If the new business is expected to earn $72,000 of after-tax net income in the first year, what rate of return on beginning equity will Kelly earn under each alternative plan? Which plan will provided the higher expected return?