Business is going well for Email Designers. The board of directors of this family-owned company believes that Email Designers could earn an additional $1,000,000 income before interest and taxes by expanding into new markets. However, the $4,000,000 the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must issue securities to outsiders. They are considering three financing plans. Plan A is to borrow at 6%. Plan B is to issue 100,000 shares of common stock. Plan C is to issue 100,000 share of non voting, $2.50 preferred stock of common stock. ($2.50 is the annual cash dividend for each share of preferred stock.) Email Designers currently has net income of $1,200,000 and 400,000 share of common stock outstanding. The company’s income tax rate is 40%

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How do I log the non voting stock on the balance sheet?

To determine the best financing plan for Email Designers, we need to calculate the after-tax income for each plan. Here's how we can analyze each plan:

Plan A: Borrow at 6%
First, we need to calculate the interest expense for the loan. The loan amount required for growth is $4,000,000, and the interest rate is 6%. Therefore, the interest expense would be:

Interest Expense = Loan Amount * Interest Rate
Interest Expense = $4,000,000 * 0.06 = $240,000

Next, we subtract the interest expense from the net income to calculate the after-tax income:

After-Tax Income = Net Income - Interest Expense
After-Tax Income = $1,200,000 - $240,000 = $960,000

Plan B: Issue 100,000 shares of common stock
Since Email Designers currently has 400,000 shares of common stock outstanding, issuing an additional 100,000 shares would dilute the ownership. However, there would be no interest expense associated with this plan.

To calculate the after-tax income, we need to account for the additional taxes due to the increased net income. Here's how we can do that:

Taxable Income = Net Income + Additional Income from New Shares
Taxable Income = $1,200,000 + ($1,000,000 - Dividends on Preferred Stock)
Dividends on Preferred Stock = Number of Preferred Shares * Dividend per Share
Dividends on Preferred Stock = 100,000 * $2.50 = $250,000

Taxable Income = $1,200,000 + ($1,000,000 - $250,000) = $1,950,000

Taxes = Taxable Income * Tax Rate
Taxes = $1,950,000 * 0.40 = $780,000

After-Tax Income = Net Income - Taxes
After-Tax Income = $1,200,000 - $780,000 = $420,000

Plan C: Issue 100,000 shares of non-voting, $2.50 preferred stock
This plan involves issuing preferred stock with a $2.50 annual cash dividend per share. Similar to Plan B, we need to calculate the after-tax income, taking into account the additional taxes due to increased net income and dividend payments:

Taxable Income = Net Income + Additional Income from New Shares - Dividends on Preferred Stock
Taxable Income = $1,200,000 + ($1,000,000 - $250,000) - $250,000 = $1,700,000

Taxes = Taxable Income * Tax Rate
Taxes = $1,700,000 * 0.40 = $680,000

After-Tax Income = Net Income - Taxes - Dividends on Preferred Stock
After-Tax Income = $1,200,000 - $680,000 - $250,000 = $270,000

Based on these calculations, we find the after-tax income for each plan as follows:

Plan A: $960,000
Plan B: $420,000
Plan C: $270,000

Therefore, Plan A seems to be the most favorable option as it yields the highest after-tax income of $960,000. However, it's important to consider other factors like control, ownership dilution, and the financial position of the company before making a final decision.