Ralph Googlio started a new security business in August of 2011. The company has been doing well, and Ralph is interested in expanding the business. He believes that an additional $172,000 is needed and is investigating three funding sources.
• Ralph's sister Amanda is willing to invest $172,000 in the business as a common shareholder. Since Ralph currently has about $258,000 invested in the business, Amanda's investment will mean that Ralph will maintain about 60% ownership, and Amanda will have 40% ownership of the business.
• Ralph's uncle Tony is willing to invest $172,000 in the business as a preferred shareholder. Tony would purchase 1,720 shares of $100 par value, 7% preferred stock.
• Ralph's banker is willing to lend him $172,000 on a 7%, 10 year note payable. He would make monthly payments of $2,000 per month for 10 years.
The assignment
1. Evaluate the three proposals for expansion, providing the pros and cons of each option.
2. Which option do you recommend that Ralph adopt? Explain
3. Also discuss why the book value of common stock is not always a good estimate of its market value