Assignment - Exploring Financing options John needs money to expand his business and can either borrow...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Assignment - Exploring Financing options John needs money to expand his business and can either borrow or sell additional equity to new investors. John currently owns 75% of his company; other family members own the remaining 25%. He has an offer from an investor willing to pay $250,000 for a 25% ownership in the business. Complete the information below for Scenario A, John's company borrows $250,000 and Scenario B, he sells an additional $250,000 in common stock. Assume that revenues and expenses (other than those related to debt) do not change. (Money raised from either debt or equity will be reinvested in the business but you do not have to show the increase in assets or any potential increase in revenues). Which option would you advise John to take (more debt or sell equity); what is the risk if he follows your advice? Bonus questions: 1. What is the actual cost of borrowing (it is not 3%) ? 2. What percentage of the business will John own if he chooses to sell equity? Abbreviated Balance Sheet Information Liabilities Debt Stockholder's Equity Common Stock (currently 200,000 shares/ $1 each) Retained Earnings Total Equity Abbreviated Income Statement Revenues Expenses (not including interest and taxes) Inc. before interest and taxes Interest expense (at 3% on debt amt. above) PreTax Income Taxes (rate of 25%) Net Income ROE Debt to Equity Ratio Currently $175,000 $200,000 $450,000 $650,000 $125,000 60,000 65,000 5,250 59,750 14,937.50 $ 44,812.50 .069 .269 Scenario A Scenario B Assignment - Exploring Financing options John needs money to expand his business and can either borrow or sell additional equity to new investors. John currently owns 75% of his company; other family members own the remaining 25%. He has an offer from an investor willing to pay $250,000 for a 25% ownership in the business. Complete the information below for Scenario A, John's company borrows $250,000 and Scenario B, he sells an additional $250,000 in common stock. Assume that revenues and expenses (other than those related to debt) do not change. (Money raised from either debt or equity will be reinvested in the business but you do not have to show the increase in assets or any potential increase in revenues). Which option would you advise John to take (more debt or sell equity); what is the risk if he follows your advice? Bonus questions: 1. What is the actual cost of borrowing (it is not 3%) ? 2. What percentage of the business will John own if he chooses to sell equity? Abbreviated Balance Sheet Information Liabilities Debt Stockholder's Equity Common Stock (currently 200,000 shares/ $1 each) Retained Earnings Total Equity Abbreviated Income Statement Revenues Expenses (not including interest and taxes) Inc. before interest and taxes Interest expense (at 3% on debt amt. above) PreTax Income Taxes (rate of 25%) Net Income ROE Debt to Equity Ratio Currently $175,000 $200,000 $450,000 $650,000 $125,000 60,000 65,000 5,250 59,750 14,937.50 $ 44,812.50 .069 .269 Scenario A Scenario B
Expert Answer:
Answer rating: 100% (QA)
Solution Answer I would advise John to follow scenario A as ROE is higher compa... View the full answer
Related Book For
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey
Posted Date:
Students also viewed these accounting questions
-
Carl Redmon decided to expand his business and begin selling accounting software, as well as providing consulting services. During January, Carl Redmon Consulting completed these transactions: Jan ?...
-
What is the risk if an employer makes an inaccurate statement during the hiring process?
-
If an organization can borrow money or sell stock, it does not have a capital constraint. Is this statement true or false? Discuss the rationale for your answer.
-
The following is a comparative consolidated Statement of Financial Position for a particular firm X: Consolidated Balance Sheet (S in Millions) Current assets Cash and short-term investments Accounts...
-
Carl Mason was discussing summer employment with Kevin Cross, president of Juniper Landscaping Service: Kevin: I'm glad that you're thinking about joining us for the summer. We could certainly use...
-
Use a graphing utility to find the derivative of each function at the given number. f(x) = x sinx at /4
-
Find the = 0.05 critical value for the chi-square statistic with 14 degrees of freedom.
-
Shen and Smith [Ind. Eng. Chem. Fundam., 7, 100-105 (1968)] measured equilibrium-adsorption isotherms at four different temperatures for pure benzene vapor on silica gel, having the following...
-
Provide a comprehensive discussion on the impact of technological progress on economic growth in the short, medium, and long run. How does technological progress interact with other economic...
-
1. Which process should VBB choose to produce?? 2. How much would VBP be willing to pay for the testing that is currently offered, for each batch?? 3. Would we be considered a perfect test, at twice...
-
Discussion Summarize the major problem/s. Identify alternative solutions to this/these major problem/s (there is likely to be more than one solution per problem)(if any). Briefly outlines each...
-
Some Restaurateurs elect to lease, rather than buy, some types of advanced equipment such as point-of-sale (cashiering) systems and office computers. Why do you think leasing these items may make...
-
Escape velocity from the planet Coruscant is reportedly 15.71 km/s. If the mass of the planet is 1.64 x 1025 kg, find the radius of the planet. Make sure that you explain to me how you derived the...
-
6. Consider these two utility functions: U(x, y) = ln(x)+ln(y) and U(x, y) (xy) 0.5. If two utility functions are equivalent, then the demand functions derived from them are identical. Two utility...
-
Considering the past, the present and the future, what is your view on the future of positive psychology? -How can positive psychology be sustained?
-
Describe the financial statements' roles in evaluating company performance. Briefly and in general terms: Assess the strengths and limitations of financial statement analysis in evaluating a...
-
Under the terms of a divorce agreement entered into in 2017,Tina was to pay her husband Joe $5,000 per month. Tina??s paymentswill be reduced to $3,000 per month when their 10 year-old sonbecomes 2...
-
(a) Prove that form an orthonormal basis for R3 for the usual dot product. (b) Find the coordinates of v = (1, 1, 1)T relative to this basis. (c) Verify formula (5.5) in this particular case. 48-65...
-
Discuss the sources of information used to prepare a cash budget for a manufacturing entity.
-
Comment on how the inclusion of environmental and social indicators in a balanced scorecard might contribute to an organisations profitability.
-
Im really not sure our information systems are as well placed as they could be to help us drive our performance. The industry data and my own observations suggest we need to do better in this regard....
-
During its first year of operations, Environmental Products Inc. had sales of \(\$ 875,000\), all on account. Industry experience suggests that Environmental Products's bad debt expense will be \(\$...
-
Use the solution to exercise S4-8 to answer these questions about Environmental Products Inc. for 2020. 1. Start with Accounts Receivable's beginning balance \((\$ 80,000)\) and then post to the...
-
If Maritimes Ltd. fails to make an adjusting entry for the accrued interest, which of the following will happen a. Net income will be understated, and liabilities will be overstated. b. Net income...
Study smarter with the SolutionInn App