COFFEE CALL SEEKS FUNDS FOR EXPANSION
Coffee Call is a small, independent coffee shop. It is run by two brothers Erin and Carl Shutter. They are keen to increase sales by using the shop space more effectively and install three new tables. This will, however, require a significant investment and the sisters have approached the bank with a business plan for the expansion with the aim of securing loan finance. The Brothers have been approached by a venture capitalist who is willing to fund the expansion in return for a 20% stake in Coffee Call. The sisters are concerned to keep the liquidity of the business secure during the expansion.
The following cash flow data have been produced by Coffee Call’s accountant for the period January to June:
- Sales for the first three months of the year will be $20,000, rising to $40,000 in the following three months once Coffee Call has installed the extra seating.
- Material costs are 50% of sales and are paid each month. - Electricity and gas cost $4,000, with half paid in February and the remainder in September
- Staff wages of $2,000 are paid each month, but this will rise to $3,000 after three months once Coffee Call has expanded
- Erin and Carl draw $10 000 each out of the business in March December
- Marketing costs of $500 are paid each month
- A loan of $20,000 is taken out in February to fund the expansion. -The $20,000 cost of fitting the new tables is paid in March
- The brothers believe the tables can be fitted in three days without any disruption to sales. -The opening cash balance is $7,000.
Question:
1-Discuss the advantages and disadvantages of Coffee Call using the venture capitalist as a source of finance.
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