Question 1: Compare the two financing options in terms of projected return on the owner’s equity investment. Ignore any effect from income taxes.
After reading both of the finance options, it is clear that the percentage of the company’s stock will go up to 60% if he can find an equity investor for the remaining $200,000. If not, the company’s stock will be at only 6%, and that is if he is able to borrow the money.
Question 2: What if Dalton is wrong and the company earns only 4 percent in operating profits on total assets?
If Dalton is wrong and the company earns only 4% rather than 6% in operating profits on total assets, then he could lose roughly 2% of what he has been calculating out in order to earn the profits themselves. 2% does not seem like much at first, but if you think about it, that’s a big drop when he could possibly only be making 6% to begin with if the numbers are correct. 2% would not be much to lose if the beginning number were to be at 60%, like they had guessed it would be if they could find and equity investor.
Question 3: What should Dalton consider in choosing a source of financing?
All in all, Dalton needs to consider the bigger picture. Whether or not he spends a lot at the beginning, he needs to focus on how much he will actually make a profit off of. If finding an equity investor gives him a higher percentage down the road, then that is what he needs to do. On the other hand though, if doing that gives him less profits down the road, he needs to consider borrowing the money instead.