John Applewood is evaluating some financing alternatives that are available to his company as it begins its operations. The company has already issued 500 common shares at $100 per share. Now John's accountant has prepared projected year-end financial statements using three different alternatives to obtain an additional $50,000: (1) borrow $50,000 at the beginning of the year with repayment terms of $10,000 per year and interest at 6% per year; (2) issue 500 common shares for $100 per share ($50,000 in total) at the beginning of the year; and (3) issue 500 $6 noncumulative preferred shares for $100 per share ($50,000 in total) at the beginning of the year.
Selected information related to each of these three alternatives follows:

Instructions
(a) Using the information provided above, assist John by calculating the debt to total assets, return on common shareholders' equity, and basic earnings per share ratios for each alternative at the end of year.
(b) Based upon your calculations in part (a), which alternative provides for the least amount of debt? Why?
(c) Which alternative provides for the highest return on common shareholders' equity? The highest basic earnings per share?
(d) If you were John, at the beginning of the year, which alternative would you choose? Why?

Alternative 1 (Borrow 850.000) Alternative 2 (Issue $50,0o0Alternative 3 (Issue S50,000 common shares) preferred shares) $195.28o $ 71,98o Total assets, end of year Total liabilities, end of vear Total shareholders' equity $207,680 S 31,98o $204,680 S 31,98o Preferred shares, beg. 0 of year Issue of 50o shares Preferred shares, end of year Common shares, beg of year Issue of 50o shares Common shares, end of vear 50,000 50,000 50,000 51,700 21,600 Retained earnings, beg of year Add: Net income Less: Preferred dividends declared Retained earnings, end of year 51,700 51,700 24,000 24,000 0 3,000 73,300 75,700 72,700