Question

04 Case 2. (Learning Objective 4: Analyze alternative ways of raising $5 million) Business is going well for Park 'N Fly, the company that operates remote parking lots near major airports. The board of directors of this family-owned company believes that Park 'N Fly could earn an additional $1.5 million income before interest and taxes by expanding into new markets. However, the $5 million that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must consider issuing securities to outsiders. The directors are considering three financing plans. Plan A is to borrow at 6%. Plan B is to issue 100,000 shares of common stock. Plan C is to isue 100.000 shares of nonvoting, $3.75 preferred stock (S3.75 is the annual dividend paid on Course D 1713c 89dSdObB67c61e987a1db64s5cb358 Go Fit Wid each share of preferred stock). Park 'N Fly presently has net income of $3.5 million and 1 million shares of common stock outstanding. The company's income tax rate is 35%. Requirements 1. Prepare an analysis to detormine which plan will result in the highest earnings per share of common stock 2. Recommend a plan to the board of directors. Give your reasons.

can I get the answer to this question please?

Answer 1

Financing $ 5million through
	Borrowing @ 6%		Issuance of common stock		Isuuance of preferred stock
	Plan A		Plan B		Plan C
	Amounts in million except Earning per share
Net Income Before Expansion		$3.5		$3.5		$3.5
Expected Project Income before Tax	$1.5		$1.5		$1.5
Interest Income	($0.3)		0		0
Expected Project Income Before Tax	$1.2		$1.5		$1.5
Income tax @35%	(0.42)		(0.525)		(0.525)
Expected Project Income		$0.78		$0.975		$0.975
Total Net income after expansion		$4.28		$4.475		$4.475
Less:preferrence dividend						$0.375
Income available for equity shareholders		$4.28		$4.475		$4.10
No. of equity shares outstanding		1 million		1.1 million		1 million
Earning per share		$4.28		$4.068		$4.10

2)As we can see from above table , the earning for share is highest when we follow Plan A- borrow at 6%

• because interest is tax deductible
• There is no dilution of voting rights
• Plus the earning per share is highest within the 3 options