Assignment - Exploring Financing options

John needs money to expand his business and can either borrow or sell additional equity to new investors. John currently owns 65% of his company; other family members own the remaining 35%. He has an offer from an investor willing to pay $250,000 for a 25% ownership in the business. Complete the information below for Scenario A, John's company borrows $250,000 and Scenario B, he sells an additional $250,000 in common stock. Assume that revenues and expenses (other than those related to debt) do not change. (Money raised from either debt or equity will be reinvested in the business but you do not have to show the increase in assets or any potential increase in revenues). Which option would you advise John to take (more debt or sell equity); what is the risk if he follows your advice? Bonus questions: 1. What is the actual cost of borrowing (it is not 3%)? 2. What percentage of the business will John own if he chooses to sell equity?

Abbreviated Balance Sheet Information
	Currently	Scenario A	Scenario B
Liabilities
Debt	$175,000
Stockholder's Equity
Common Stock (currently 200,000 shares/ $1 each)	$200,000
Retained Earnings	$450,000
Total Equity	$650,000
Abbreviated Income Statement
Revenues	$125,000
Expenses (not including interest and taxes)	60,000
Inc. before interest and taxes	65,000
Interest expense (at 3% on debt amt. above)	5,250
PreTax Income	59,750
Taxes (rate of 25%)	14,937.50
Net Income	$ 44,812.50
ROE	.069
Debt to Equity Ratio	.269