A business investment is financially justified only if the projected rate of return from the business is higher than the WACC of the capital investment. When having a business, a decision that involves finances can only be justified if the expected rate of return is higher than that of the weighted average cost of capital.
So the objective is to select the optimal expansion strategy for El Caf by benchmarking the projected rates of return against the WACC. Their were different plans developed, but he would only invest if he could be provider of funds.
I could have the loan interest loans offered by the state. So the objective is to avoid a takeover by Caf Inn.
What I learned was that a seven city expansion had an even higher rate of return. The challenge was to raise adequate financing, and find reliable sources of capital. You use it to determine if you should spend money on.
Scenario two is the fact that an optimal expansion strategy to spread the company into multiple cities around the area is another decision that has to be made.
Typically debt helps a company save money on taxes being able to put it into the tax deductible category. What I learned from this was since the cost of equity was higher than the cost of debt, it would have been better to keep a debt component of at least 70 percent in the financing mix.
What I learned was that the optimal solution would have been to borrow money to buyback at least 50 percent of my equity from Uncle Jorge. Since their was not any investors showing interest, debt and Uncle Jorge seemed to be the only options.
In order for the equity component to be low, the weighted average cost of capital would have to be low as well. If the rate of return on your spending is less than.
The problem that you have to keep in mind is that since the company is tax exempt, the goal is to make sure that the ownership of this company does remain where it currently is.
Because the cost of equity is higher than the cost of debt this is a true statement. WACC is your weighted average cost of capital. In the last scenario the company must avoid the risk of going bankrupt.
In the simulation by choosing a 7 city expansion with an all dept option, I was able to find out that this would be the most viable option for the time being since the rate of return is high and the weighted average cost of capital is low.
I had decided to borrow money and buy back 30 percent of El Caf equity from Uncle Jorge. Many options are available that can be used in order to avoid this devastating problem Some of the options can include selling assets, renegotiating debt, and swapping debt for newly obtained equity.When speaking about debt-equity mix it is important to include the aspects of a capital structure, debt-equity structure and the capital structure are interconnected.
The preferred mix depends on what an organization finds a balance between debt- equity mixes to achieve it minimum cost of capital. Aug 01, · Equity financing does not come with the same collateral and covenants that can be imposed with debt financing. Another benefit to equity financing also does not increase a firms risk of default.
Debt-Equity Mix Simulation: El Caf. Essay by jarretperkins, University, Bachelor's, A+, March Debt-Equity Mix Simulation Summary.
The simulation starts out in an extremely popular coffee shop in Nicollet Mall in Minneapolis, Minnesota. The coffer shop, "El CafÃ Â©", has been doing very well with its mix of regulars and the owner has /5(1). Debt versus Equity Financing Brenda L. Rochelle ACC/ November 7, Carl Mir Debt versus Equity Financing Introduction In this paper, the author will attempt to compare and contrast lease versus purchase options by providing definitions of debt financing and equity financing and providing examples of each.
Debt-Equity Mix Simulation: El Caf state such as zero taxes and low interest loans for small businesses. In this type of situation I decided it would be better to go with the low interest loans and change my debt-equity mix to %.4/5(4).
Finance and Short-term Debt Essay. Words Nov 5th, 4 Pages. Show More. We decided to invest $1, in all the different TQM options in the simulation and saw positive results. By the end of round four, our short-term debt was $25, and out stock price had increased significantly to $ he will have to buy out the equity of.Download