Question: A firm wants to raise $28 million dollars. Share Price is $60/share. $1 Annual Dividend. The firm has a higher debt ratio than others in its industry. $3.5 Million Net Income. With the planned expansion it expects to generate additional $3 million dollars per year. Additional revenue will be 0 for years 1 and 2. Annual additional revenue may vary 20% from the estimated year. Select the best option:
1) Issue common stock directly to public. There are currently 985,000 shares outstanding. The new share price would be sold at $57/share with $2/share underwriting cost
2) Offer its current shareholders to maintain thier current proportionate townership. They would issue rights to shareholders to purchase these share at $48/shar. Flotation cost would be $1.00/share.
3) Issue 10 year, 5.50% non-converttible subordianted debenturees. These would be issued at par with a 2% commsission being paid to the investment banker for underwriting and distributing services. There would be a sinking fund requirement of $4 million/year beginning the 4th year.