The Right Mix- Debt vs. Equity

The Right Blend

Week 3 of Finance 325 required students to complete the exemplar titled Determining the Debt Equity Mix: The Right Blend. This example asked students to work through various stages of a newly started strange coffee cheat, while determining the right debt-equity combination and optimal Weighted Average Cost of Capital (WACC). Students were given ownership of an extremely popular coffee shop named, El Café. The shop is located in the very diverse community of Minneapolis, Minnesota. Founded deuce-ace years ago primarily using personal nest egg on a minimal bud bring forth, El Café has become quite a profitable therefore, students were asked to consider a possible expansion into another(prenominal) areas of the city. In 2001, the city was designated a special economic regularise and the governor announced zero taxes and a break on interest baring loans. This was a perfect time for the geographic expedition of a possible citywide expansion followed by a multi-city expansion as well.

The first step in the cover was to generate backing. Understanding that the level of competition and the number of competitors had change magnitude approximately $400,000.00 for every two stores would need to be raised. Students were tasked with attempt to find suitable sources for capital while selecting a debt-equity change integrity that minimized the Weighted Average Cost of Capital (WACC).



The option of a capital structure with 70 percent debt proportion allowed El Café to achieve the low WACC figure of 8.65 percent. Had the equity grammatical constituent been any higher the WACC would have been higher as well. This debt proportionality also kept the overall debt for El Café in a very manageable range.

Step two of the simulation takes place in the year 2004 and required students to analyze the feasibility and possible financing options for a multi-city expansion. El Cafés goal was to accelerate growth...

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