Question: A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,250,000. The cost to start up this restaurant will be $2,000,000. Two financing alternatives are being considered:
a) 50% equity financing and 50% debt at 12%, or
b) all equity financing. Common stock can be sold at $5 per share.