1. Suppose a financier has displayed interest in financing the business of James and Peter. Why would a financier be more attracted in purchasing a convertible debenture for $400, 000 rather than in lending the business $400, 000 at a 10 percent interest rate? Explain.

2. If James and Peter want to use break-even analysis but has some problem assigning some costs as either variable or fixed, can they use break-even analysis. Yes or No? Justify your answer.

James and Peter are two young entrepreneurs who ventured out to open their bookstore two years ago in Suva. They predicted it would take them eight months to break even. Since they had gone into the venture with enough capital to keep them afloat for ten months, they were sure they would require no outside financing. Nonetheless, sales have been quite slower than envisaged and most of their money now have been utilized to procure inventory or meet monthly expenditures. On the other hand, the store is doing better each month and James and Peter contend they will be able to turn a profit within six months.

Presently, James and Peter want to procure additional financing—they would like to raise $120,000 to increase their product line. The store currently emphasizes extensively on how-to-do-it books and is growing a faithful customer following. Nonetheless, this market is not large enough to carry the business. James and Peter are of the view that if they expand into added markets such as cookbooks, they can develop two market segments that, when combined, would prove profitable. James and Peter think that cookbooks are a vital niche and they have   saved clippings from national newspapers stating that those who buy cookbooks have the tendency to expend more money per month on these purchases in comparison to the average book buyer. In addition, customer loyalty among this group inclines to be very high. James and Peter own all of their inventory that has a retail value of $290,000. The merchandise cost them $150,000. They also have at a local bank a line of credit of $12,000. Of this amount, they have utilized $5,000. Most of their monthly expenses are covered out of the initial capital with which they commenced the business ($180,000 in all). Yet, they will be out of money in three months if they are not able to get additional sources of funds.  

James and Peter have looked into investigating many sources. The two principal ones are a loan from their bank and a private share offering to investors. Moreover, they know little about how to raise money and these are common ideas they have been deliberating with each other. Nevertheless, they do have a meeting arranged with their accountant, a colleague, who they hope can advise them on how to raise more capital. In the meantime, James and Peter are putting a lot of attention on writing a business plan that spells out their short business history and objectives and explains how much money they would like to raise and where it would be invested. They expect to have the plan completed before the end of the week and take it with them to the accountant. The major problem they are having in writing the plan is that they are uncertain of how to direct their presentation. Should they aim at a banker or a venture capitalist? After they meet with the accountant, they intend to refine and direct it towards the suitable source.

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answers Answer a If we look at the perspective and the future planning of the business it seems that ... View the full answer