Glamour Mining Ltd. currently has a debt to equity ratio of 2.5-to-1, based on $80 million of debt and $32 million of equity. The company is looking to raise $16 million in new financing and must choose one of the following:
A. Convertible debt, unsecured, with a 7% interest rate, where conversion is mandatory in 25 years for 700,000 voting common shares. Interest is paid in cash annually.
B. Convertible debt, secured with company land and buildings, with a 6% interest rate, where conversion is at the investor’s option in 25 years for 800,000 voting common shares. Interest is paid in cash annually. This conversion option is estimated to be worth $1,835,200.

C. Preferred shares, carrying an annual dividend of 5%, where the investor has the choice of cash repayment or 800,000 common shares in 25 years. There is a debt covenant that requires the debt to equity ratio to be no higher than 3:1.

Required:
1. Calculate and comment on the relative annual cost of each alternative from the company’s perspective. The company has a 35% tax rate. For the investor, what are the attractive elements of each investment?
2. Classify each alternative as debt or equity and recalculate the debt to equity ratio. Use 7% as a market yield rate if present value calculations are needed.
3. Which alternative would you recommend to Glamour? Explain.