Problem 4 - Capital Structure Mix Guess Who Inc. is considering an expansion of Manufacturing Capacity. This expansion is the first for the company and will slightly more than double plant capacity. The reason for the expansion is that Guess Who believes that it can sell its product line on a national basis instead of the smaller regional basis that it has been selling to for 5 years. The firms sales last year were $24,000,000 with an EBIT ratio of 12% and a NI ratio of 5%. The tax rate is 30%. The new financing will total $15,000,000. Discuss primary factors that the firm should consider when choosing a capital structure mix that could include short term debt (for this purpose let's define as less than 3 years for maturity, long term debt (for this purpose let's define as more than 3 years for maturity), preferred stock, and common stock. The firm is currently owned by a small group of five local business people who started the firm 8 years ago. The total interest bearing Debt Ratio is 45%. Existing short term debt (half of the 45%) carries an interest rate of approximately 4.4% and the cost of existing long term debt (half of the 45%) is 5.2%. Existing total assets equal $10,000,000, Debt $4,500,000, Equity $5,500,000. At this time equity is fully comprised of common stock and retained earnings.

Be sure to identify the pros and cons of each potential option for financing the expansion. You don't have enough information to reach a final conclusion but you do have enough to inform existing ownership about the pros and cons of each financing path. The quantitative information isn't enough to calculate specific cost of capital values but it does offer some influential guidance in helping you educate ownership about the pros and cons. Be as specific as you can for the existing ownership of Guess who. I'm primarily interested in your communication that you fully understand characteristics that are associated with each of the four financing options above and specifically how the pros and cons affect Guess Who ownership/