Homework answers / question archive / Vuyo Kholisi is well on his way to starting a new business venture-Vuy Inc

Vuyo Kholisi is well on his way to starting a new business venture-Vuy Inc

Finance

Share With

Vuyo Kholisi is well on his way to starting a new business venture-Vuy Inc. He has projected a need for R350,000 in initial capital. He plans to invest R150,000 himself and either borrow the additional R200,000 or find a partner who will buy equity stock in the company. If Vuyo borrows the money, the interest rate will be 6 percent. If, on the other hand, another equity investor is found, he expects to have to give up 60 percent of the company's stock. Vuyo has forecasted earnings of about 16 percent in operating profits on the firm's total assets.

i. Compare the two financing options in terms of projected return on the owner's equity investment. Ignore any effect from income taxes.

ii. Supposing Vuyo is wrong, and the company earns only 4 percent in operating profits on total assets, decide on the two financing options.

iii. Describe what should Vuyo consider in choosing a source of financing Prepare a cash budget for January, February and March.