P9-77A. (Learning Objective 4: Financing operations with debt or with shares) Viola Sporting Goods is embarking on a massive expansion. Assume plans call for opening 25 new stores during the next three years. Each store is scheduled to be 30% larger than the company’s existing locations, offering more items of inventory, and with more elaborate displays. Its management estimates that company operations will provide $1.5 million of the cash needed for expansion.

Viola must raise the remaining $7.5 million from outsiders. The board of directors is considering obtaining the $7.5 million either through borrowing or by issuing share capital.

Requirement 1. Write a memo to Viola’s management discussing the advantages and disadvantages of borrowing and of issuing share capital to raise the needed cash. Which method of raising the funds would you recommend?