John has a great idea to setup a pie and pastie factory. He needs $200,000 to buy the equipment and to lease suitable premises for a year. He is not sure whether he should setup a company and issue 200,000 shares to his friends, or else try to borrow $200,000 from a bank to raise those funds. Explain to him the advantages and disadvantages of both alternatives.

Lady Maria is thinking about starting a new business. The company would require $500,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the business can provide a 9.5% return on the invested capital, which means that the company must have an ROE of 9.5%. How much Net Income must be expected to warrant starting the business?

Kaleo has made up his mind—he wants a pool in the family’s backyard! He figures his kids and spouse will be thrilled. However, to cover the cost of the pool, they’ll have to pack up and live away from home for a few weeks during the summer to rent their home to vacationers. He crunched the numbers based on the following estimates. 1. Cost of pool/installation   $50,000 2. Life of the pool (no salvage value)   20 years 3. Annual net cash inflows from renting (net of cash expenses for renting and pool maintenance)   $6,500 4. Tax rate   23% 5. Average rate of return    8% Kaleo’s daughter, Sarah, found the above information written on a sheet of paper in his office, along with the following notes. “This is a no-brainer! We’ll recover the cost of this pool in just 7 years, even though we plan to live here until we’re old and gray, or at least as long as the pool hangs on. If we can rent our house out for just 3 weeks each year, it’ll be almost pure profit that we can put toward paying off…

The Case:Hassan Mustafa has recently started his new job as a financial manager in a firm called ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000. To raise the required capital, the company decided to issue bonds. Since ScanSoft had no expertise in issuing and selling bonds, Hassan suggested that the company work with an investment dealer. The investment dealer bought the company's entire bond issue at a discount, and then planned to sell the bonds to the public at face value or the current market value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20 and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi- annually.Hassan Mustafa realized that when the bonds mature on January 20, 2041,…