Business is going well for Air Parking Unlimited (APU), a company that operates remote parking lots near major airports. The board of directors of the family-owned company believes that APU 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 issue 100,000 shares of nonvoting, $3.75 preferred stock ($3.75 is the annual dividend paid on each share of preferred stock). APU 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 determine 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.