Tracey White, the owner of the Buzz Coffee Shop chain, has decided to expand her operations. Her 2012 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 percent tax rate and no other changes, should Tracey buy the two coffeehouses? Why or why not? Which financing option results in the better ROE?

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Buzz Coffee Shops, Inc. 2012 Financial Statements Balance Sheet Income Statement Current assets Fixedassets Total assets $500,000 200.000 $250,000 Sales .750.000 -Costs and expenses @ 40% $1000,000 Eamings before interest and taxes (EBIT) $300,000 Current liabilities Long-tem debt Totalliabilities Common equity Totalliabilities andstockhold ers equity 00,000 Interest expense $300,000 120.000 $180,000 0 Netprofit before taxes $ 300.000 -Taxes @ 40% Net income