Blooming Valley Custom Landscaping provides

landscaping services to a variety #319

Blooming Valley Custom Landscaping provides landscaping services to a variety of clients in
southern Ontario. The company’s services include planting lawns and shrubs and installing
outdoor lighting and irrigation systems, as well as constructing decks and gazebos. The
company also remains very busy in the winter by using its trucks for snow removal. Blooming
Valley would like to extend its operations into the northern United States, but Jack Langer, the
owner, feels that the company would require at least $2 million in new capital before such a
venture could be successful. Langer is excited about the prospects of expanding because his
projections indicate that the company could earn an additional $750,000 in income before
interest and taxes.Currently, Blooming Valley has no long-term debt and is entirely owned by
the Langer family, with 300,000 common shares outstanding. The company’s current net
income before tax is $900,000, with a tax rate of 25% that is not expected to change if the
expansion goes ahead.As the family does not have sufficient financial resources to undertake
the expansion, it would be essential to obtain outside financing. Mr. Langer is considering three
financing options:Option 1The first option is to borrow, using a conventional hank loan. Interest
on the loan would be 9% annually with monthly payments of principal and interest required.
Option 2The second possibility is to issue 100,000 common shares to a local venture capitalist.
As part of the plan, the venture capitalist would be given a seat on the hoard of directors and
would also have a say in the day-to-day running of the company.Option 3The final option is to
sell 100,000 non-voting cumulative preferred shares. The preferred shares would have an
annual dividend of $2.85. A number of investors have expressed interest in purchasing these
shares.Required:a. Calculate the effect of each financing option on the company’s earnings per
share. Which option will result in the highest earnings per share?b. Recommend an option to
Mr. Langer and explain your reasoning. Be sure to consider both quantitative and qualitative
factors as part of your analysis.View Solution:
Blooming Valley Custom Landscaping provides landscaping services to a variety

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