Rasmussen College Smart Clean Inc Debt Financing Discussion

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Rasmussen University

Description

For this part of the course project, you will demonstrate your ability to identify how firms raise funds through the use of debt, equity, and retained earnings.

Your client, SmartClean, Inc., is a cleaning service for office and industrial locations. SmartClean has been in business for 5 years and has shown steady revenue growth each year. The owner originally started the business using a business loan. The owner has $10,000 remaining on the loan after steadily making payments and has an excellent personal and business credit history.

The owner wishes to expand the SmartClean business into three new territories, needs an infusion of capital, and is looking for $50,000 in order to make the expansion.

The expected fixed costs for the current business and expansion is $75,000. SmartClean's average charge per job is $250.00. The variable costs per job is $35.00.

To complete this assignment, write a 5-page, APA formatted proposal that includes the following parts:

  • Summary of client needs
  • Advantages and disadvantages of debt financing
  • Advantages and disadvantages of equity financing
  • Recommendation for a financing strategy for SmartClean
  • Complete breakeven analysis (based on given price analysis and cost)

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Explanation & Answer

Attached.

Running Head: DEBT FINANCING

1

Debt Financing
Student’s Name
Institution Affiliation
Date

DEBT FINANCING

2
Debt Financing

SmartClean Inc. is my client and offers cleaning services for industrial locations and
offices. SmartClean Inc. has been in operation for five years now and has experienced constant
income growth every year. Initially, the business owner had started it through borrowed capital.
There is $10,000 worth of loan that is remaining after SmartClean Inc. had made regular
payments. SmartClean Inc. has an excellent credit history, both business and credit. There are
several options that my client, SmartClean Inc., has to raise its required capital for them to
expand the business according to their goals and objectives. They have two primary choices,
which are Equity financing and Debt financing.
According to the owner's expectations and goals, the business wants to open three other
new territories, and therefore, the owner needs an infusion of capital worth $50,000 to expand.
SmartClean Inc. expects a fixed cost of $75,000 for both the expansion and current business. The
company's average cost and variable cost per job are $250 and $35, respectively. Debt financing
refers to borrowing a loan from a bank, commercial finance companies, or financial institutions
to fund a business project. Debt financing will help the business to startup the three new
territories. It will also help it buy equipment and other requirements before the business earns
income to finance their operations. The creditors on debt financing have no control over the
activities of the business. The loan is returned to the lender installments, which are a
combination of interest and principal, and the interest is tax-free. The table below summarizes
needs.
Quantity

Total
Revenue

Variable Cost Fixed Cost

Total Cost

Profit/Loss

DEBT FINANCING

3

0

0

0

$75, 000

$75, 000

($75, 000)

500

$125, 000

$17, 500

$75, 000

$92, 500

$32, 500

1000

$250, 000

$35, 000

$75, 000

$110, 000

$140, 000

1500

$375, 000

$52, 500

$75, 000

$127, 500

$247, 500

2000

$500, 000

$70, 000

$75, 000

$145, 000

$355, 000

2500

$625, 000

$87, 500

$75, 000

$162, 500

$462, 500

3000

$750, 000

$105, 000

$75, 000

$180, 000

$570, 000

The main advantage of debt financing is that...


Anonymous
I was struggling with this subject, and this helped me a ton!

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