Assume that Yelp decides to launch a new website to market discount bookkeeping services to consumers. This chain, named Aladin, requires $500,000 of start-up capita. The founder contributes $375,000 of personal assets in return for 15,000 shares of common stock, but he must raise another $125,000 in cash. There are two alternative plans for raising the additional cash. plan A is to sell 3,750 shares of common stock to one or more investors for 125,000 cash plan B is to sell 1,250 shares of cumulative preferred stock to one or more investors for $125,000 cash (this preferred stock would have a $100 par value, have an annual 8% dividend rate, and be issued at par). The new business is expected to earn $72,000 of after-tax income in the first year, What share of income wil
Assume that Yelp decides to launch a new website to market discount bookkeeping services to consumers. This chain, named Aladin, requires $500,000 of start-up capita. The founder contributes $375,000 of personal assets in return for 15,000 shares of common stock, but he must raise another $125,000 in cash. There are two alternative plans for raising the additional cash.
plan A is to sell 3,750 shares of common stock to one or more investors for 125,000 cash
plan B is to sell 1,250 shares of cumulative
The new business is expected to earn $72,000 of after-tax income in the first year,
- What share of income will be available to the funder under each alternative plan?
- What
rate of return on beginning equity will the funder earn under each alternative plan? - Which plan will provide the higher expected return?
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Plan A |
Plan B |
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Net income |
$72,000 |
$72,000 |
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Less preferred dividends |
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10000 |
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Net income for common shareholders |
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Founder’s share of common equity |
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Founder’s share of income after any preferred stock dividends |
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Founder’s initial equity |
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Founder’s return on equity |
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