You are going to start a business to produce and sell cakes. According to your forecasts, you will sell 7,500 cakes per year at an average price of 9. The cost of 5 ingredients is 3.5 per cake. Personnel costs are expected to be 24,000 per year and there are other non-financial costs that amount to 1,500 per year.

a) Calculate the return on assets of this business if the value of total assets that are needed to start operations is 120,000.

b) You have 120,000 in the bank but you are considering the possibility to ask for a loan to finance part of the business, since otherwise you would have to use all your savings to finance the business. You are talking to several banks to understand the conditions they offer in their loans. From a financial point of view, what is the highest interest rate that you should be willing to pay?

c) One bank has offered to lend you 30,000 at a 9-percent interest rate and another bank offers you a loan of 20,000 at an 8-percent interest rate. Assuming that you want to maximize return on equity, which loan is better? Assume that irrespective of the loan that you choose, you would use your own savings to complete the funding.

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