Question 4 . Pearson Inc. is currently financed by 30% equity (that is 70% debt)

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Question 4

.     Pearson Inc. is currently financed by 30% equity (that is 70% debt). Pearson%u2019s operations are marginally profitability and thus it generates a limited of positive cash flows each year (and in some years the cash flows are negative). Pearson would like to expand its operations by purchasing two new spas. Should Pearson finance the new spas by equity, debt pr a combination of debt and equity? Justify your recommendations by discussing the advantages and disadvantages of equity and debt financing.

b. Carsom Inc. is financing its new restaurant by borrowing 75% of the cost of the resturant @8%. The rest of the funds will be obtained from its current shareholders who demand 15% rate of return. Compute Carsom weighted average cost of capital if its tax rate is 40%.

Explanation / Answer

I can help you out of the first part of the question.!!

Pearson must finance the spas by equity as profit and equity are directle proportional because Profit increases equity. Additional investment also increases equity.

Advantages of equity financing:

1.Funding committed to our business and intended projects

2. In common with you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.

This is all I can help.!! Please do rate with good ratings..!!

Good lUck.!!

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