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?

She funded the business with her own equity.

• 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.

The required rate of return on equity would most likely be higher than the average 15% because of the higher risk small businesses face. There are often times a lack of resources and customer reach with small businesses compared to publicly traded companies. There is also not a lot of guarantee when it comes to earnings.

• After the business was established and Bon Bon Bon had primarily wholesale customers, Clark talked about expanding into a full-time retail location. Suppose that Clark considered buying a small building for the new, full-time retail location (rather than renting space). This is a good example of an investment project that a business must evaluate. 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.

The required rate of return for Clarks building purchase would more likely be higher than the overall chocolate company's required rate of return. This is because there is a great risk when buying a building, more than the chocolate company. It's harder to sell a building and get funds out of it than a small business would be, and the money used to purchase the building could have been used elsewhere in her business to grow it further.

• Should Clark use some bank debt to finance all or a portion of the potential retail building purchase?
  • Justify your answer by explaining how the weighted average cost of capital for the company would change if Clark uses bank debt to finance all or a portion of the building purchase.

Using some bank debt to finance a portion of the potential retail building could be very beneficial. The weighted cost of of capital would change because utilizing a bank loan can lower the overall cost of capital for the company, there are also some tax benefits to utilizing a bank loan, and diversifying the sources of funding will lower the risk. There will however be interest payments and could limit the company's financial flexibility. Overall, I think it would be best for Clark to finance through the bank.

• 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.

If Clark uses debt to finance the entire building purchase this will increase financial risk and could put the company in financial stress. There is a lot of interest that would come with financing through the bank as well as less financial flexibility. Overall, it would put the entire company at high financial risk.