Discussion And 2 Replies
After watching the video, answer the following questions in your post:
- Did Alex Clark initially fund the business with equity or debt?
- Initially, Clark’s chocolate business is very small. Compared to publicly traded companies, would Clark’s required rate of return on equity be higher or lower than the “average” required rate of return on equity for small cap companies of 15%? Explain your answer.
- After the business was established, Clark talked about buying a building to expand. This is a good example of an investment project that a business must evaluate. Would the required rate of return for Clark’s building purchase be higher or lower than the overall chocolate company’s required rate of return? Explain your answer.
- Should Clark use some bank debt to finance all or a portion of the building purchase?
- Justify your answer by explaining how the weighted average cost of capital for the company would change if Clark uses bank debt to finance all or a portion of the building purchase.
- What is the primary risk that Clark faces if she uses debt to finance the entire building purchase? For purposes of this discussion, assume that the debt would then comprise 95% of the company’s capital structure.
Guided Response: Review several of your colleagues’ posts, and reply to at least two of your peers by 11:59 p.m. on Day 7 of the week. In your written responses to your classmates, address the following:
- Provide feedback on your peers’ answers, including whether you agree or disagree with any of the answers or reasoning provided. Justify your opinion.
- State your opinion on whether Clark should use debt to finance the building purchase, and if so, how much debt should be used (as a percent of the total building price). Justify your opinion.