Problem:
Dave Ambrose and Barb Maiels each own 2,000 shares of stock, representing all of the common stock outstanding in a rural bottled gas company. They need 20,000 and have three choices of securing the funds: (a) borrowing 20,000 for a period of three months, april, may, and june and again for a period of three months, october, november, and december at a yearly interest rate of 12%. (b) selling 2,000 additional shares of common stock at $10 each to raise a total of 20,000 for permanent working capital. (c) selling 2,000 shares of preferred stock at $10 a share with a dividend rate of 14 percent. In other words these owners are faced with a need for cash to finance their operation, and they must decide whether to borrow the money, to sell common stock, or to sell preferred stock. Assume that the profit of the company is 36,000 a year without anticipating any interest charges.
Required:
Question 1) How will the interest on the borrowed money affect Dave and Barb's profits if 20,000 is borrowed as indicated?
Question 2) How will their profits be affected if 2,000 shares of common stock are sold?
Question 3) How will Barb and Dave's profits be affected if 2,000 shares of preferred stock are sold?
Provide the solution of given numerical problem and show step by step calculation.