FINANCE 617 - You decide to start your own business.

Part 1

You decide to start your own business. You decide that you want to start a coffee shop. You name the business 'No Small Coffee Bean' (NSCB).

Suppose you need to raise $100,000 to start your business. What are three sources of funds that you could use to raise the money? What incentive would you need to offer to attain the money from these sources? Why might some sources receive more "payment" than other sources?

Part 2

Suppose you decide to fund the business with $25,000 of your own money; $50,000 from a bank loan and $25,000 from a friend. What interest rate would you expect to pay to the bank, your friend, and yourself (you may be able to use your information from part 1)? Why would these rates probably differ? What would be your average interest rate (cost of capital)? (Note you will need to compute a "weighted average"- you can compute the weights by taking the total amount borrowed from each source and dividing this by the total amount raised).

Part 3

Consider the difference between the interest paid to a bank and the dividend you pay yourself as the owner of your coffee shop, do both of these payments show up on the income statement? Do they both represent a tax deductible expense? Does it take more before tax dollars to pay something before tax or after-tax?