Assignment 2 Business 100 Name Background Information Needed

Assignment 2 Business 100namebackground Information Needed To Answ

Review Shaun's criteria below to determine the best financing option to expand his business:

Shaun’s Criteria:

• Estimate of $150,000 needed to increase capacity for five additional pop-up stands.
• Funds to increase marketing efforts to stimulate demand.
• Cash flow will be tight; prefer to minimize interest payments.
• Aim to maintain or increase profit margins.
• Desire to add a thought partner with experience in big discount retail channels.
• Plan to seek additional capital in two years for further expansion; want to enhance credibility now.

Funding Options:

1. Option 1: Equity raise of $150,000 from a venture capital firm for 30% of the company.
2. Option 2: Secure a $150,000 loan at 10% annual interest, to be repaid over 7 years.
3. Option 3: Combine a $100,000 loan at 7% interest to be repaid over 7 years, and self-finance the remaining $50,000.

Question 1: Based on your analysis of Shaun's criteria and the three financing options available, which financing method is the best fit?

Answer below with an explanation of why you selected that option, considering Shaun's criteria and the characteristics of each financing method.

Background information needed to answer Question #2:

A junior accountant has inquired about what to do next in the accounting cycle after completing certain tasks. Review her email to identify which steps of the cycle she has completed and determine what the next step should be to progress in the process.

Question 2: Given what the Junior Accountant has done so far, what is the next step for her to complete in the accounting cycle and why?

Background information needed to answer Question #3:

A potential investor has requested information regarding SunsTruck’s current debt. Your task is to review the financial statements and advise which statement will provide the debt information and where exactly on that statement it can be found.

Question 3: After reviewing the three financial statements, which one should the Junior Accountant provide to the investor to show the debt information, and where on that statement is the debt reported?

Final instructions:

Follow the steps to submit your work, including saving the document, uploading it via the course portal, and submitting accordingly. If issues arise, contact the instructor for assistance. Feedback will be provided after grading, and resubmission is possible if needed.

Paper For Above instruction

In evaluating Shaun’s optimal financing strategy for expanding his business, it is imperative to analyze each available option in the context of his criteria: minimal interest costs, maintaining profit margins, credibility for future financing, and managing cash flow constraints. The three options—equity, debt, and a hybrid of debt with self-financing—each possess distinct strategic implications and financial considerations.

Analysis of Shaun’s Criteria and Financing Options

Shaun seeks a financing method that minimizes interest expenses, suggesting a preference for debt over equity, which generally involves lower ongoing costs compared to equity financing that involves giving away ownership and future profit sharing. Additionally, since cash flow is tight, a longer repayment period or manageable installment payments become priorities. Maintaining profit margins indicates that any financing should not significantly dilute margins or impose burdensome costs that would erode profitability.

The first option, equity financing, involves giving up 30% of the company in exchange for $150,000 from a venture capital firm. While this provides the necessary capital without immediate repayment obligations, it could dilute ownership and decision-making power, and potentially impact profit margins over time. Given Shaun’s desire to build credibility for future expansion, bringing in an experienced partner from retail channels could be facilitated by this option if the venture capital firm also offers strategic guidance, though this is not specified.

The second option, a debt-only approach at a 10% annual interest rate over 7 years, aligns with Shaun’s desire to keep interest costs low and avoid ownership dilution. This option spreads out payments over a long period, easing cash flow pressures and preserving profit margins. However, the total interest paid over time would amount to a significant sum, impacting profitability.

The third option combines a smaller loan at a lower 7% interest rate with self-financing the remaining capital. This option reduces interest costs relative to the second option and retains ownership fully, which aligns with the goal of preserving profit margins and demonstrating credibility independently. The self-financed portion also signifies Shaun’s commitment, which can bolster credibility with future investors.

Conclusion and Recommendation

Considering Shaun's criteria—particularly the need to minimize interest payments, avoid dilution, maintain margins, and build credibility—the hybrid approach (Option 3: debt plus self-financing) emerges as the most balanced solution. The lower interest rate on the loan reduces financial burden, while self-financing demonstrates Shaun’s commitment and enhances credibility for future capital raising.

Furthermore, this approach aligns with the goal of ensuring cash flow remains manageable, as the loan repayments are spread over seven years, providing stability during the early expansion phase. It also leaves the door open for additional capital infusion in the future, as Shaun can leverage increased credibility resulting from prudent financial decisions now.

In summary, the combination of a moderate loan with a personal investment (Option 3) meets Shaun’s strategic and financial priorities, balancing cost, control, and future growth prospects.

Answer to Question 2

The accounting cycle consists of five key steps: journalizing transactions, posting to the ledger, preparing a trial balance, adjusting entries, and preparing financial statements. Based on the junior accountant's current activities, if she has already recorded transactions in the journal and posted these to the ledger, the next step would be to prepare an unadjusted trial balance. This step verifies that total debits equal total credits, establishing a preliminary check before adjusting entries are made. This critical step ensures the accuracy of the recorded data before financial statements are prepared and provides a basis for identifying and correcting discrepancies that could affect the validity of financial reports.

Answer to Question 3

The junior accountant should provide the balance sheet to the potential investor. The balance sheet reports the company's assets, liabilities, and equity at a specific point in time, including the current debt obligations under liabilities. The debt information – such as loans payable or bonds payable – is typically listed under liabilities, either as current liabilities if the debt is due within one year, or long-term liabilities if due after one year. Locating this information on the balance sheet would involve examining the liabilities section, where details about the company's outstanding debt obligations are documented. This provides the investor with a clear understanding of the company’s current debt position and overall leverage.

References

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• Graham, J. R., & Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187-243.
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