Your best friend is very excited. They've decided to start a printing company, focused on servicing...
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Your best friend is very excited. They've decided to start a printing company, focused on servicing business and corporate customers. They've come to you for advise on how to set the company up. Your friend estimates sales will be $3,000,000 per year. They're considering two printing presses. The first is more expensive, but more automated. If your friend chooses this option, variable costs will be $700,000 per year, but fixed costs will be quite high ($1,800,000 per year). The alternative is a less expensive press that would require more labour for set-up and production. If they purchased the second press, variable costs will be $1,800,000 per year and fixed costs would be $700,000 per year. Your friend is also trying to understand if there's a benefit to borrowing money from the bank to finance the printing business, or would they be better off financing the business through shareholder's equity. They believe they can finance the entire $5,000,000 in assets they will need by selling 500,000 shares to friends and family. Alternatively, the bank is willing to lend them $3,000,000 at 8.0% interest with the rest coming from the sale of 200,000 shares to friends and family. The company faces a tax rate of 30% Obviously there are four different ways your friend can put together their balance sheet. They can: (a) buy the expensive press and finance it entirely through shareholder's equity (b) buy the expensive press and finance it through a combination of debt and shareholder's equity (c) buy the less expensive press and finance it entirely through shareholder's equity (d) buy the less expensive press and finance it through a combination of debt and shareholder's equity (Note: Whether they buy the more-expensive or less-expensive press, assume they will always need $5,000,000 in assets. If they buy the less expensive press, they simply will have more money to invest in inventory.) Your best friend is very excited. They've decided to start a printing company, focused on servicing business and corporate customers. They've come to you for advise on how to set the company up. Your friend estimates sales will be $3,000,000 per year. They're considering two printing presses. The first is more expensive, but more automated. If your friend chooses this option, variable costs will be $700,000 per year, but fixed costs will be quite high ($1,800,000 per year). The alternative is a less expensive press that would require more labour for set-up and production. If they purchased the second press, variable costs will be $1,800,000 per year and fixed costs would be $700,000 per year. Your friend is also trying to understand if there's a benefit to borrowing money from the bank to finance the printing business, or would they be better off financing the business through shareholder's equity. They believe they can finance the entire $5,000,000 in assets they will need by selling 500,000 shares to friends and family. Alternatively, the bank is willing to lend them $3,000,000 at 8.0% interest with the rest coming from the sale of 200,000 shares to friends and family. The company faces a tax rate of 30% Obviously there are four different ways your friend can put together their balance sheet. They can: (a) buy the expensive press and finance it entirely through shareholder's equity (b) buy the expensive press and finance it through a combination of debt and shareholder's equity (c) buy the less expensive press and finance it entirely through shareholder's equity (d) buy the less expensive press and finance it through a combination of debt and shareholder's equity (Note: Whether they buy the more-expensive or less-expensive press, assume they will always need $5,000,000 in assets. If they buy the less expensive press, they simply will have more money to invest in inventory.)
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Related Book For
Business Law The Ethical Global and E-Commerce Environment
ISBN: 978-0071317658
15th edition
Authors: Jane Mallor, James Barnes, Thomas Bowers, Arlen Langvardt
Posted Date:
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