Over the Hill Savings has been told by examiners that it needs to raise an additional $8 million in long-term capital. Its outstanding common equity shares total 5.4 million, each bearing a par value of $1. This thrift institution currently holds assets of nearly $2 billion, with $135 million in equity. During the coming year, the thrift's economist has forecast operating revenues of $180 million, of which operating expenses are $25 million plus 70% of operating revenues. Among the options for raising capital considered by management are (a) selling $8 million in common stock, or 320,000 shares at $25 per share; (b) selling $8 million in preferred stock bearing a 9 percent annual dividend yield at $12 per share; or (c) selling $8 million in 10-year capital notes with a 10 percent coupon rate. Which option would be of most benefit to the stockholders? (Assume a 34% tax rate.) What happens if operating revenues are more than expected ($225 million rather than $180 million)? What happens if there is a slower-than-expected volume of revenues (only $110 million instead of $180 million)? Please explain.
