RUNNING HEADER: DEBT-EQUITY SIMULATION
Determining the Debt-Equity Mix Summary
Determining the Debt-Equity Mix Summary
El Café is a recently founded coffee shop with some very typical business decisions to make within the simulation. Decisions which include expanding communities, selecting a debt-equity mix, avoiding bankruptcy are all involved within this simulation to make the business a profitable one. Being in a business that has a relative as a potential investor, financial strife and capital it's important to make sure the decisions that are being made are ones that are for the better of the company.
Within the first scenario that was to be completed the debt-equity mix that is involved with the company and it's financing. The business partner, Uncle Jorge, offers to give all the money needed for the company as long as the finances will be going through him. With this decision it would give him a seat as a primary stockholder for the company and basically put all the control in his hands. After reading through the information provided within the summary, a 30% equity and 70% debt mix is the best to use because the interest rates are low and are available in the city, not to mention that the business has a tax exempt status. In order for the equity component to be low, the weighted average cost of capital would have to be low as well. Because the cost of equity is higher than the cost of debt this is a true statement. Typically debt helps a company save money on taxes being able to put it into the tax deductible category. 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. To be a ...