Debt Financing vs. Equity Financing

Case Analysis #2: Debt Financing vs. Equity Financing

Setup a new MS WORD document to write your analysis, and name your file by “First Name, Last Name, Case 2”, i.e. “Jessie Yang Case 2”, then upload your case analysis file below.

Vancouver Coffee Shop Co. is planning to expand its business in the next year to New Westminster near Yorkville University and needs financing of $200,000 to fulfill its goals. Assume the Company has no excess cash to finance its expansion; the market interest rate is 5%; the Company has 100,000 shares outstanding with a value of $10 per share, and it estimates that it will earn a net income of $100,000 the next year before considering the cost of financings.

What are the two options for the Company to fulfill its financing goals? What are the annual “cost of financing” for each option? Which option is less expensive? Which option is less risky? What are the pros and cons of each option? Which financing option would you recommend Vancouver Coffee Shop to choose? Give your assumptions/conditions and reasons.

Rubrics:

Item

Grade

Identify two financing options clearly

10

Calculate the annual cost of financing for each option

10

Identify and explain the less expensive option

10

Identify and explain the less risky option

10

Summarize the pros and cons of each option

20

Explain in what conditions each option is better

20

Explain the recommendations and reasons

20

Total

100