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 Currently Scenario A Scenario B Liabilities Debt $175,000 $200,000 Stockholder's Equity Common Stock (currently 200,000 shares/ $1 each) Retained Earnings Total Equity $450,000 $650,000 $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 5,250 59,750 14,937.50 $ 44,812.50 ROE Debt to Equity Ratio .069 .269