Assignment - Exploring Financing options: Debt versus Equity 1. John Brown owns a business and wants to expand. He can either borrow money or sell additional equity. Currently he is the sole owner of the business. Complete the information below for two different scenarios: In Scenario A, John's company borrows an additional $200,000 and in Scenario B, the company sells (company raises money) an additional $200,000 in common stock at $1 per share. Complete the columns below for Scenarios A & B. Which option would you advise John to take (more debt or sell equity) and why? 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 other assets or any potential increase in revenues). Abbreviated Balance Sheet Information Currently Scenario A Scenario B More Debt More Equity Liabilities $75,000 Debt Stockholder's Equity Common Stock (currently 200,000 $200,000 shares/ Sl each) Retained Earnings $ 50,000 Total Equity $250,000 $125,000 60,000 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 65,000 2,250 62.750 15,687.50 $ 47,062.50 ROE Debt to Equity Ratio 188 .30