Coffee & Cats, Inc. is going to be formed by a group of investors to provide a coffee shop that also houses cats up for adoption that patrons can interact with while they enjoy their coffee. Their initial capitalization goal is $50,000. That is, the incorporators have decided to raise $50,000 to acquire the initial assets of the company. They have narrowed down the financing mix alternatives to two:

Alternative 1: All equity financing ($50,000)

Alternative 2: $30,000 in debt financing and $20,000 in equity financing

No matter which financing alternative is chosen, the incorporators expect to be able to generate a 10% annual return, before payment of interest and income taxes, on the $50,000 in assets acquired.

The interest rate on debt would be 8%. The effective income tax rate will be approximately 25%.