Analyze alternative plans for raising money
Response to the following problem:
RRS Financial Services is considering two plans for raising $900,000 to expand operations. Plan A is to borrow at 5%, and plan B is to issue 300,000 shares of common stock at $3.00 per share. Before any new financing, RRS Financial Services has net income of $650,000 and 225,000 shares of common stock outstanding. Assume you own most of RRS Financial Services' existing stock. Management believes the company can use the new funds to earn additional income of $800,000 before interest and taxes. RRS Financial Services' income tax rate is 40%.