Parlyn Stanton is on her way to starting a new venture – ABCD, Inc. She has projected a need for $350,000 in initial capital. She plans to invest $150,000 herself and either borrow the addional $200,000 or find a partner who will buy stock in the ocmpany. If Parlyn borrows the money, the interest rate will be 6%. If on the other hand, another equity investor is found, she expects to have to give up 60% of the company’s stock. Parlyn has forecasted earning of about 16% in operating profits on the firm’s total assets.
Questions:
Compare the 2 financing option in terms of projected return on the owner’s equity investment. Ignore any effect from income taxes!
What if Parlyn is wrong, and the company earns only 4% in operating profits on total assets?
What should she consider in choosing a source of financing.?
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