Business is going well for Valley Forest Products Inc. The board of directors of this family owned company believes that the company could earn an additional $9,000,000 in income after interest and taxes by expanding into new markets. However, the $30,000,000 that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of Valley Forest Products Inc., must consider issuing securities to outsiders. They are considering three financing plans.

Plan A is to borrow at 8 percent. Plan B is to issue 300,000 common shares. Plan C is to issue 300,000 nonvoting, $7.50 cumulative preferred shares. The company presently has net income before tax of $18,000,000 and has 1,500,000 common shares outstanding. The income tax rate is 35 percent.

Required

1. Prepare an analysis similar to Exhibit 15-8 to determine which plan will result in the highest earnings per common share.

2. Recommend one plan to the board of directors. Give your reasons.