case analysis

profileDalbir Singh

 

Case Analysis #2: Debt Financing vs. Equity Financing

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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

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