Clarks started a chocolate business that was fully funded by her for $32,000. Meaning she started the business on equity not debt. She has stayed local but now sales her chocolate nation wide through online sales.

1) Initially, Clark's chocolate business is very small. Compared to publicly traded companies, would Clark's required rate of return on equity be higher or lower than the "average" required rate of return on equity for small cap companies of 15%?

(I thought since she funded the business herself that she should seek a higher ROE, but this would require more funding so I'm not sure how to explain it)

2)After the business was established, Clark talked about buying a building to expand. This is a good example of an investment project that a business must evaluate. Would the required rate of return for Clark's building purchase be higher or lower than the overall chocolate company's required rate of return?

3)Should Clark use some bank debt to finance all or a portion of the building purchase? Justify your answer by explaining how the weighted average cost of capital for the company would change if Clark uses bank debt to finance all or a portion of the building purchase.

(I believe she should use some bank debt to finance a portion of the building purchase because it would increase her return on equity. But I'm having trouble explaining my reasoning)

Answer rating: 100% (QA)

Analyzing Clarks Chocolate Business 1 Required Rate of Return Higher Compared to publicly traded companies Clarks required return on equity ROE would ... View the full answer