Assignment 2 Business 100 Name Background Information 237556

Assignment 2 Business 100namebackground Information Needed To Answ

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

Hi Team, I wanted to provide you some guidelines as you determine how we’ll finance our expansion. Please give this careful consideration, as we need to get this right.

• I estimate we’ll need $150,000 to increase capacity in order to stock the five additional pop-up stands.
• We’ll need to make sure we have additional funds available to increase our marketing efforts to stimulate demand.
• Cash flow is going to be tight, so I’d like to minimize interest payments.
• I’d like to maintain or increase our profit margins.
• Since I don’t have a lot of experience with big discount retailers, I’d like to add a thought partner with experience in this channel.
• If we’re successful over the next two years, we’ll likely seek additional capital to expand into more stores, so I’d like to do all we can now to enhance our credibility.

We need to move on this quickly, so I’d like an answer by the end of the week. -Shaun

FINANCING OPTIONS

As we have learned, there are pros and cons to all financing methods. Which of the three financing methods would be the best fit based on Shaun's criteria above?

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

Question 1: Based on your analysis of the owner's wishes (Shaun's criteria) and the three financing options available, which financing option would be the best option? Include your response below and explain why you selected that type of financing based on Shaun's criteria and what you know about that financing option.

Paper For Above instruction

Considering Shaun’s detailed criteria and the three proposed financing options, the optimal choice for funding the expansion is Option 3: Debt combined with Self-Financing. This selection best aligns with Shaun's priorities of minimizing interest payments, maintaining profit margins, and preserving credibility for future funding opportunities.

Shaun emphasizes the importance of minimizing interest payments due to expected tight cash flow, which makes the higher-interest venture capital stake less attractive. Equity financing (Option 1) involves giving up 30% ownership, potentially diluting control and profits, which might not be ideal since Shaun also aims to maintain or enhance profit margins. Moreover, venture capital investors often seek substantial control and influence, which might complicate operational decision-making and strategic direction, especially since Shaun wants to add a trusted partner with retail experience. Therefore, equity financing does not meet Shaun's criteria for limited interest payments and control retention.

Option 2, debt financing of $150,000 at 10% interest over seven years, aligns better with Shaun’s goals of cash flow management and profit preservation. While the total interest costs will be significant, this approach avoids diluting ownership. However, the full $150,000 debt could strain cash flows, especially since Shaun notes that cash flow will be tight. The annual interest payments are fixed, and over seven years, they could impact profitability. Nonetheless, it still remains a feasible option if carefully managed.

Option 3 combines a smaller loan of $100,000 at a lower 7% interest rate with self-financing the remaining $50,000. This hybrid approach reduces loan interest costs compared to Option 2, directly addressing Shaun’s concern about interest payments. Since Shaun plans to secure additional capital in the future, maintaining credibility with lenders and investors now is vital; lower debt levels and interest expenses contribute positively to that goal. Additionally, self-financing the remaining $50,000 shows commitment and could improve financial credibility, making the business more attractive for future capital raises.

Furthermore, this blended option offers flexibility. The smaller debt load alleviates concern about cash flow strain, while self-financing demonstrates Shaun’s investment in the company, potentially increasing credibility. It also facilitates future funding pursuits by maintaining a healthier debt-to-equity ratio, which is important for expansion into new markets.

In conclusion, Option 3 stands out as the most suitable financing method in light of Shaun's priorities. It balances debt management with personal investment, limits interest payments, and supports future credibility. This strategic approach maximizes resources without overburdening cash flows, thereby enabling the business to grow prudently while adhering to Shaun’s financial and operational criteria.

Question 2

While the specific email from the junior accountant is not provided, the typical steps of the accounting cycle include journalizing transactions, posting to the ledger, preparing tentative trial balances, adjusting entries, and preparing financial statements. Based on the question, if the junior accountant has already completed some of these steps, the next step is likely to be adjusting entries or preparing the financial statements.

The next step in the accounting cycle after posting transactions and preparing initial trial balances is usually to review and record adjusting entries. Adjusting entries are necessary to recognize revenues and expenses in the correct period, ensure accuracy of accounts, and comply with accounting principles. Once these are recorded and posted, the final financial statements can be prepared, including the income statement, balance sheet, and statement of cash flows.

Therefore, if the junior accountant has already categorized and posted transactions, the next step is to prepare and record adjusting entries to finalize the accounts for the reporting period. This ensures that the subsequent financial statements accurately reflect the company’s financial position and performance.

Question 3

The potential investor has requested information regarding SunsTruck’s current debt. To provide an accurate depiction of the company's debt obligations, the appropriate financial statement is the Balance Sheet.

The Balance Sheet, also known as the Statement of Financial Position, displays a company's assets, liabilities, and equity at a specific point in time. Under liabilities, the balance sheet reports current and long-term debts, loans, and other financial obligations, making it the ideal statement to review for current debt information.

Debt information can primarily be found in the liabilities section of the balance sheet, under categories such as "Current Liabilities" or "Long-term Liabilities," depending on the maturity of the debt. Here, the total amount of outstanding loans and borrowings will be listed, providing the investor with a clear understanding of SunsTruck’s debt status.

In contrast, the income statement mainly reports revenues and expenses over a period, and does not provide a detailed view of current liabilities. The statement of cash flows indicates cash inflows and outflows but does not specifically detail debt balances. Thus, the balance sheet is the definitive financial statement for debt information.

References

• Gibson, C. H. (2021). Financial Reporting and Analysis (15th ed.). Cengage Learning.
• Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
• Libby, T., Libby, R., & Short, D. G. (2019). Financial Accounting (9th ed.). McGraw-Hill Education.
• Revsine, L., Collins, D. W., Johnson, W. B., & Mittelstaedt, F. H. (2018). Financial Reporting & Analysis (8th ed.). Pearson Education.
• Street, S., & Rittenberg, L. (2019). Financial & Managerial Accounting (12th ed.). Cengage Learning.
• Scott, W. R. (2021). Financial Accounting Theory (4th ed.). Prentice Hall.
• Cashin, D. (2020). Fundamentals of Financial Management. Pearson Education.
• Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2020). Introduction to Financial Accounting. Pearson.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2022). Financial Statement Analysis. McGraw-Hill.