Page 484 - Business Principles and Management

C HAPTER 17 A SSESSMENT

CASE 17-2: Financing Business Expansion
Doria Russell had just sold a half-acre lot on one side of her prosperous
tile and wallpaper shop. She decided to sell it because she needs the money
to enlarge the store as part of her business expansion plan. Currently she
sells window treatments including shades, curtains, drapes, and other ac-
cessories in addition to floor and decorative tile and wallpaper. She wants
to add an interior-decorating center with some small model rooms to dis-
play her products as they would appear in homes. She needs the remaining
empty lot to enlarge her current building and to expand the parking lot.
Doria estimates she will need $500,000 to reach her growth goal, but
not all at once. She needs time to find and hire an architect, obtain a build-
ing permit, and start construction. Once the building is enlarged, she will
then order inventory items, hire a part-time decorator and an additional
installer, and plan a promotional campaign. Each step will take time, and
overlooked tasks might require additional time and money.
Doria received $200,000 for the half-acre lot she sold and will use this
money as the major source of initial financing. Her business currently has
$40,000 in a savings account and $80,000 in a mutual fund. She does not
want to use any of her personal savings to finance the business’s new
venture. Because she has some time before she needs money for the project,
her plan is to invest her current funds in such a way that cash will be
available when needed, but she will also earn as much as possible on the
investments until the expansion is completed. Doria believes the total
plan will take from 18 to 36 months to complete once it starts 6 months
from now.
Doria is willing to take some financial risk but cannot really afford to
lose any of the money she has accumulated to finance the project. She ac-
cepts the possibility that she might need a short-term loan once or twice
if major costs arise at the same time, but she will resort to loans only if
necessary.

THINK CRITICALLY

1. What is the total amount of money Doria has available to invest?
2. As Doria’s investment adviser, suggest an overall financial plan that
includes a timeline for investing available funds that will enable her
to reach her goals. Provide reasons for your investment advice.
3. If Doria needs a short-term loan, what type of loan would you
recommend she seek and from what type of financial institution?
Justify your recommendation.
4. Assume a year has passed and that Doria’s plan is on schedule, but
she needs a $75,000 loan. Find out where she can get a six-month
loan at the lowest interest rate. Compare your best loan terms with
those of others in your class.

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