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Debt-Equity Mix Simulation Summary Introduction Finding the right balance is important When talking capital structure decision one must get the right blend of debt and equity In this simulation provided by the University of Phoenix I was asked to use the Weighted Average Cost of Capital WACC to find the optimal debt-equity mix for a cafeacute business known as El Cafeacute During the simulation what seemed optimal at first was quickly changed in certain situations and a musical chairs with the debt-equity mix was the only way out Debt-Equity Mix Simulation Summary The simulation starts out in an extremely popular coffee shop in Nicollet Mall in Minneapolis Minnesota The coffer shop El Cafeacute has been doing very well with its mix of regulars and the owner has been thinking about expanding into a chain of coffee shops across the city We know that expanding wont be easy because of the competition out there and because one will require much more money UOP 2006 The first challenge was to first raise enough funds and financing to open an additional two coffee shops in the city about 400000 There were two options The first came from Uncle Jorge Campos who is more than willing to invest in the business venture in return he wants to take charge in some of the key operations or use the special promotions being offered by the state such as zero taxes and low interest loans for small businesses In this type of situation I decided it would be better to go with the low interest loans and change my debt-equity mix to 70-30 By using this mix I was able to achieve a WACC Weighted Average Cost of Capital of 865 What is WACC Generally speaking a companys assets are financed by either debt or equity WACC is the average of the costs of these sources of financing depending on the given situation By taking a weighted average
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