Assignment – Exploring Financing options
1. John Brown owns a business and wants
to expand. He can either borrow money or sell additional equity. Currently he is the sole owner of the business. Complete the information below for two different scenarios:
1a)In Scenario A, John’s company borrows $200,000 and in Scenario B, the company sells an additional $200,000 in common stock at $1 per share. Complete the columns below for Scenarios A & B.
1b)Which option would you advise John to take (more debt or sell equity) and why?
Assignment – Exploring Financing options1. John Brown owns a business and wants to expand. He can either borrow money orsell additional equity. Currently he is the sole owner of the business. Complete theinformation below for two different scenarios: In Scenario A, John’s companyborrows $200,000 and in Scenario B, the company sells an additional $200,000 incommon stock at $1 per share. Complete the columns below for Scenarios A & B.Which option would you advise John to take (more debt or sell equity) and why?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 youdo not have to show the increase in assets or any potential increase in revenues).Abbreviated Balance Sheet InformationCurrently Scenario A Scenario BLiabilitiesDebt$75,000Stockholder’s EquityCommon Stock (currently 200,000$200,000shares/ $1 each)Retained Earnings$ 50,000Total Equity$250,000Abbreviated Income StatementRevenues$125,000Expenses ( not including interest and60,000taxes)Inc. before interest and taxes65,000Interest expense (at 3% on debt amt.2,250above)PreTax Income62,750Taxes (rate of 25%)15,687.50Net Income$ 47,062.50ROE188Debt to Equity Ratio.30
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