12 Aug Loan Or Equity Capital – Decision Analysis
You are currently earning profits of $80,000 per year before tax and you need $250,000 to expand your business. You expect that this expansion will generate an additional $50,000 of before tax profit each year forever. You have a couple of alternatives:
1. The bank will give you an interest only loan of 6% each year for five years. At the end of this time, you can pay the $250,000 back or you might be able to roll over the loan.
2. An investor has indicated that they are willing to invest the whole $250,000 but they want a 50% shareholding of your business.
Required:
Using the information above, discuss the advantages and disadvantages of each option and explain your decision on which option you will select. You should show your calculations for each option and use these calculations to support your discussions.
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