Tony Sporting Goods is embarking on a massive expansion. Assume plans call for opening 20 new stores during the next two years. Each store is scheduled to be 30% larger than the company’s existing locations, offering more items of inventory, and with more elaborate displays. Management estimates that company operations will provide $1 million of the cash needed for expansion. Tony must raise the remaining $6.75 million from outsiders. The board of directors is considering obtaining the $6.75 million either through borrowing or by issuing common stock.

Requirement
1. Write a memo to Tony’s management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising the funds would you recommend?