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Sydney Rangers Inc operates remote parking lots near major airports. The board of directors of this family-owned company believes that Sydney Rangers could earn an additional $2 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.
Sydney Rangers's Plan 1 is to borrow at 6%. Plan 2 is to issue 100,000 common shares. Plan 3 is to issue 100,000 non-voting, $3.75 preferred shares ( $3.75 is the annual dividend paid on each preferred share). Sydney Rangers currently has net income of $3.5 million and 1 million common shares outstanding. The company's income tax rate is 25%.
Requirements:
Question 1. Make an analysis to determine which plan will result in the highest earning per common share.
Question 2. Recommend one plan to the board of directors. Explain your reasons.
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