Access over 35 million homework & study documents

Shark Tank Responses

Content type
User Generated
Subject
Management
School
Strayer University
Type
Homework
Rating
Showing Page:
1/5
What factors will be most important in determining if you want to fund your venture through equity
or take a loan for the $500,000?
Financing can come as debt or investment, and the terms of the financing can vary significantly
between the two. ‘Important factors to consider when choosing methods of financing a business
include the repayment terms, the total cost of capital, and the lender or investor’ (Ingram, 1)
To raise ‘capital for business needs, companies primarily have two types of financing as an option:
equity financing and debt financing. Most companies use a combination of debt and equity
financing, but there are some distinct advantages to both. Principal among them is that equity
financing carries no repayment obligation and provides extra working capital that can grow a
business. Debt financing does not require giving up a portion of ownership’ (Website, 2).
The most crucial factor to consider for debt financing is taking on too much debt. ‘Too much debt
could affect operating income to cover expenses and the risk of future cash flows to cover the loan
payments, economic uncertainty, and using the collateral of current assets to get a loan’ (JWI531,
Week 8 Lecture Notes, 3).
If you meet all your projections, will you be happier in five years that you used equity to fund the
venture or debt? Why?
I would use both. In five years I will be happy for three major reasons. First, because a stock that
swings more than the market over time has a beta above 1.0. (2). Second, the risk-free rate is the
return you got on a risk-free investment, such as a treasury bill (somewhere between 1-3%)’(Gallo,
4). Finally, the cost of debt ‘formula is the effective interest rate multiplied by (1 - tax rate). The
effective tax rate is the weighted average interest rate of a company's debt’(1)
If we finance it, 50% debt and 50% Equity
Debt /Equity =1
Equity Beta=(Unlevered Beta)*(1+((1-Tax Rate)(Debt/Equity))
=0.465*(1+(0.65*1))=0.465*1.65=0.767
We=Weight of Equity =0.5, Ce=Cost of Equity =Rf+Beta*(Rm-Rf)=1+0.767*7=6.37%

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/5
Wd=Weight of Debt=0.5, Cd=After Tax Cost of Debt =1%*(1-0.35)=0.65%
WACC=We*Ce+Wd*Cd=0.5*6.37% +0.5*0.65% =3.51%
If the company goes bankrupt in five years, would you have a different answer? Why?
Assuming there is a negligible risk of bankruptcy with 50% debt, they recommend it using debt
financing. This will reduce the cost of capital.
Carolyn
References:
David Ingram: Factors to Consider When Choosing Methods of Financing a Business
Website: https://www.investopedia.com/ask/answers/042215/what-are-benefits-company-using-
equity-financing-vs-debt-financing.asp
JWI 531 Week Eight Lecture Notes. Financial Management II
Amy Gallo: A Refresher on Cost of Capital
2.Crystal Kendall
Reply
I agree with your post and agree that to start any form of the venture, the business people should
take various factors into consideration. Failure to consider these factors could have a profound
impact on the firm. In the case of Chris and Erica, they should consider various factors before
embarking on opening their business in the field of the restaurant. If individuals observe these
factors, their ventures may end up in failure.
Various factors exist relating to starting a business. An individual cannot wake up and decide to
establish a venture. They must consider the availability of capital. Very few or no investments can
survive without money. Businesspersons should find a way to gather needed money to support
their venture. Money is vital to financing all the operations of the firm. Planning and market
research are essential before opening a new venture (McDaniel, 2017). An individual has to
consider the competition and the kind of products they want to offer. If a venture does not

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/5

Sign up to view the full document!

lock_open Sign Up
End of Preview - Want to read all 5 pages?
Access Now
Unformatted Attachment Preview
What factors will be most important in determining if you want to fund your venture through equity or take a loan for the $500,000? Financing can come as debt or investment, and the terms of the financing can vary significantly between the two. ‘Important factors to consider when choosing methods of financing a business include the repayment terms, the total cost of capital, and the lender or investor’ (Ingram, 1) To raise ‘capital for business needs, companies primarily have two types of financing as an option: equity financing and debt financing. Most companies use a combination of debt and equity financing, but there are some distinct advantages to both. Principal among them is that equity financing carries no repayment obligation and provides extra working capital that can grow a business. Debt financing does not require giving up a portion of ownership’ (Website, 2). The most crucial factor to consider for debt financing is taking on too much debt. ‘Too much debt could affect operating income to cover expenses and the risk of future cash flows to cover the loan payments, economic uncertainty, and using the collateral of current assets to get a loan’ (JWI531, Week 8 Lecture Notes, 3). If you meet all your projections, will you be happier in five years that you used equity to fund the venture or debt? Why? I would use both. In five years I will be happy for three major reasons. First, because a stock that swings more than the market over time has a beta ab ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
Great! Studypool always delivers quality work.

Studypool
4.7
Indeed
4.5
Sitejabber
4.4

Similar Documents