Exam (elaborations)
BUS 5111 Unit 7 Discussion Assignment (100% correct)
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A guide to assignment on the case study of Exceptional Service Grading Company. All 5 alternatives were explored in detail and accurately.
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Case StudyIn Unit 1 we are introduced to Exceptional Service Grading Company. The company has plans to
expand its business by providing new alternatives including assessing publication formats like
certifying large magazines and movie posters. To evaluate the financial health of the firm we
performed financial ratios based on the income statement and balance sheet for the years 2017
and 2018. Based on the calculations it was concluded that the company is in good financial
status.
The firm currently has less than 25 shareholders who view the business as a family business.
Here we are required to evaluate the various financing options available for this firm to gain an
investment of $500,000. There are five alternatives provided and we will use qualitative analysis
to compare these options and present their impact on the financial ratios and the shareholders.
The cost of capital is the rate of return required by the investor to cover the risk of investing in a
firm or it's the cumulative rate of interest that a firm has to pay for a borrowed capital
(lumenlearning, 2021). Firms need to consider the optimum capital structure and cost of capital
when considering options for financing.
Alternative 1 (Obtain private debt financing)
Exceptional Service Grading Company can raise $500,000 through private debt financing. This
alternative will affect the capital structure by increasing the debt-to-equity ratio. The cost of
capital will be equal to the rate of return required by the private investors that are willing to
finance the firm. This rate of return will be affected by the market, the industry, and the level of
profitability of the firm.
This will also affect the financial statements. There will be an increase on the cash and liability
side of the balance sheet. Additionally, the debt will have an interest that should be repaid and it
will be reflected in the income statement. Consequently, there will be a reduction of net income
but that would also be the taxable income will also decrease (The Investopedia Team, 2021).
When we look at the financial ratio like debt-to-equity and debt-to-total capital will increase.
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