Tracey White, the owner of the Buzz Coffee Shop chain, has decided to expand her operations. Her 2009 financial statements follow. Tracey can buy two additional coffeehouses for $3 million, and she has the choice of completely financing these new coffeehouses with either a 10 percent (annual interest) loan or the issuance of new common stock. She also expects these new shops to generate an additional $1 million in sales. Assuming a 40 per-cent tax rate and no other changes, should Tracey buy the two coffeehouses? Why or why not? Which financing option results in the better ROE?

Buzz Coffee Shops, Inc. 2009 Financial Statements

Buzz Coffee Shops, Inc. 2009 Financial Statements