Question: United Nation Financial Services is considering two plans for raising $900,000 to expand operations. Plan A is to borrow at 10%, and plan B is

United Nation Financial Services is considering two plans for raising $900,000 to expand operations. Plan A is to borrow at 10%, and plan B is to issue 250,000 shares of at $3.60 per share. Before any new financing, United Nation Financial Services has net income of $600,000 and 200,000 shares of outstanding. Assume you own most of United Nation Financial Services’ existing stock. Management believes the company can use the new funds to earn additional income of $800,000 before interest and taxes. United Nation Financial Services’ income tax rate is 40%.

Requirements
1. Analyze United Nation Financial Services’ situation to determine which plan will result in the higher earnings per share.
2. Which plan results in the higher earnings per share? Which plan allows you to retain control of the company? Which plan creates more financial risk for the company? Which plan do you prefer? Why? Present your conclusion in a memo to United Nation Financial Services’ board of directors.

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Req 1 PLAN A BORROW 900000 AT 10 PLAN B ISSUE 900000 OF COMMON STOCK Net income before expansion 600... View full answer

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