To the response below:

• 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.

Did Alex Clark initially fund the business with equity or debt?

Alex Clark initially funded her chocolate business, Bon Bon Bon, with equity (Exist Detroit, 2015). She mentions that she started with personal savings and investment from family and friends, indicating an equity financing approach to starting her business.

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.

Comparing Clark's required rate of return on equity to the "average" required rate of return on equity for small-cap companies of 15%, it's likely that Clark's required rate of return on equity would be higher. Small businesses, especially those in niche markets like artisanal chocolates, often face higher risks and uncertainties compared to larger, established companies. Therefore, investors in small businesses may demand a higher return to compensate for these risks.

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.

For the building purchase for the new retail location, Clark's required rate of return would likely be lower than the overall chocolate company's required rate of return. This is because the risk associated with the building purchase, especially for a retail location with stable cash flows and potential appreciation in value, may be lower compared to the overall risk of the chocolate business, which includes factors like market competition, demand fluctuations, and operational risks.

Should Clark use some bank debt to finance all or a portion of the potential retail building purchase?

Using bank debt to finance all or a portion of the potential retail building purchase could be beneficial for Clark and her business. If she introduces debt into the capital structure, she could potentially lower the (WACC) for the company. Debt typically has a lower cost (interest rate) compared to equity, so incorporating debt can reduce the overall cost of capital, making investments more attractive.

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.

The primary risk that Clark faces if she uses debt to finance the entire building purchase is the increased financial leverage and associated interest obligations. If debt comprises 95% of the company's capital structure, Bon Bon Bon would have significant interest payments to make, which could strain its cash flow, especially during periods of economic downturn or business volatility. Additionally, high leverage increases the financial risk and potential for bankruptcy if the company is unable to meet its debt obligations.