Equity versus loan Case Study

We are analyzing how to fund a $10,000,000 business company .

We you can either take out a $10,000,000 bank loan at a 5% percent interest rate, or you can sell a 50% stake in your business to equity investors for $10,000,000.

Suppose we project business earns a $800,000 profit during the next year.

Taxes on profits: 25%

QUESTIONS

1)Calculate net profit for a fully loan funded strategy (no equity).

2)Calculate net profit for the 50% equity stake (no loan and no dividends paid).

3)Calculate the differences in benefits between the two strategies.

4)Calculate the taxes to be paid for both strategies.