4. [10 marks] Mr. Pythagoras is starting up a new business. His estimates of next year...

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4. [10 marks] Mr. Pythagoras is starting up a new business. His estimates of next year sales, variable costs and fixed costs are as follows: Sales Variable costs Fixed costs $500,000 40% of sales $150,000 Mr. Pythagoras' assistant, Mr. Euclid estimated the start up costs to be $1.40 million. He suggested two alternatives to raise the needed capital; I- Sell $1.40 million worth of common stock at $10 a share. II- Sell 50% equity and 50 % debt. Debt can be issued at a cost of 10 %. The firm expects to be in a 40 % tax bracket. 4. [10 marks] Mr. Pythagoras is starting up a new business. His estimates of next year sales, variable costs and fixed costs are as follows: Sales Variable costs Fixed costs $500,000 40% of sales $150,000 Mr. Pythagoras' assistant, Mr. Euclid estimated the start up costs to be $1.40 million. He suggested two alternatives to raise the needed capital; I- Sell $1.40 million worth of common stock at $10 a share. II- Sell 50% equity and 50 % debt. Debt can be issued at a cost of 10 %. The firm expects to be in a 40 % tax bracket.

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To determine the best financing option for Mr Pythagoras new business we need to evaluate the two al... View the full answer