A Corporation Plans to Invest $1 Million in Oil Exploration

Essay

A corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan #1,bonds with a contract rate of interest of 6% would be issued.Under Plan #2,50,000 additional shares of common stock would be issued at $20 per share.The corporation currently has 300,000 shares of stock outstanding,and it expects to earn $700,000 per year before bond interest and income taxes.The net income and return on investment for both plans is shown below:
Comment on the relative effects of each alternative,including when one form of financing is preferred to another.