Tracey White, owner of the Buzz Coffee Shop chain, has decided to expand her operations. Her 2009 financial statements follow. Tracey can buy two additional coffeehouses for $3 million, and she has the choice of completely financing these new coffeehouses with either a 10 percent (annual interest) loan or the issuance of new common stock.
She also expects these new shops to generate an additional $1 million in sales. Assuming a 40 percent tax rate and no other changes, should Tracey buy the two coffee houses? Why or why not? Which financing option results in the better ROE?
