Reference no: EM132498893

You are currently earning profits of $120,000 per year before tax. In order to expand your business you will require $400,000 to support this expansion. You expect that this expansion will generate an additional $80,000 of before tax profit each year forever.

You have a couple of alternatives:

1. The bank will give you an interest only loan of 8% each year for five years. At the end of this time, you can pay the $400,000 back or you might be able to roll over the loan.

2. An investor has indicated that they are willing to invest the whole $400,000 but they want a 50% shareholding of your business.

Required: (Show all workings and calculations where required)

Question a. Using the information above, discuss the advantages and disadvantages of each option (at least 2 advantages and disadvantages for each option) and explain your decision on that option you will select.

Question b. Provide calculations within your analysis to justify your decision.