The case study revolves around the dilemma faced by Dottie's Grocery on how to finance their
business. The business is based in the United States and has been operating for 45 years.
Currently, it's a full-service grocery store chain with many stores around the city. The business is
held by 7 shareholders all of whom are family members. They want to expand the business hence
want to raise capital of an additional $23 million. The sum was more than what was allowed
through a bank line of credit and the family is looking for other alternatives.
They have two alternatives one is to issue debt as corporate bonds and the second is to issue
common stock to the public. The family is requiring a sound financial consultation on this matter
to get the capital they require with minimum cost. Consequently, we will analyze the pros and
cons of each option and the factors that need to be considered before making a decision.
Alternative 1
The first alternative is to publically issue debt like corporate bonds and use this as financing
means. A corporate bond is simply defined as a form of a debt security by which a business issue
and sell its share to investors to raise capital (Chen, 2020). Commonly, companies use a
combination of debt and equity to finance their business and support their day-to-day operation
and business expansion (Kenton, 2019). For this company, we have to calculate the weighted
average cost of capital and calculate several financial ratios to find the optimum level of debt and
equity.
If the business decides to use this alternative then the proportion of debt to equity will be higher
and this will affect the capital structure. However, the cost of debt is lower than the cost of equity
hence it might be beneficial. Additionally, interest is tax-deductible meaning the post-tax cost of
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