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The Right Blend Week 3 of Finance 325 required students to complete the simulation titled Determining the Debt Equity Mix The Right Blend This simulation asked students to work through various stages of a newly started exotic coffee shop while determining the right debt-equity combination and optimal Weighted Average Cost of Capital WACC Students were given ownership of an extremely popular coffee shop named El Cafeacute The shop is located in the very diverse community of Minneapolis Minnesota Founded three years ago primarily using personal savings on a minimal budget El Cafeacute has become quite profitable therefore students were asked to consider a possible expansion into other areas of the city In 2001 the city was designated a special economic zone and the governor announced zero taxes and a break on interest baring loans This was a perfect time for the exploration of a possible citywide expansion followed by a multi-city expansion as well The first step in the process was to generate financing Understanding that the level of competition and the number of competitors had increased approximately 40000000 for every two stores would need to be raised Students were tasked with trying to find suitable sources for capital while selecting a debt-equity mix that minimized the Weighted Average Cost of Capital WACC The selection of a capital structure with 70 percent debt ratio allowed El Cafeacute to achieve the low WACC figure of 865 percent Had the equity component been any higher the WACC would have been higher as well This debt ratio also kept the overall debt for El Cafeacute in a very manageable range Step two of the simulation takes place in the year 2004 and required students to analyze the feasibility and possible financing options for a multi-city expansion El Cafs goal was to accelerate growth and become a major player in the coffee house industry One of the new options introduced in this step of the simulation is the possibility
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