Assignment

Review Appendix B and the U.S. SBA Web site at www.sba.gov.

Debt and Equity Financing

1. In a 700 - 800 word paper explain the following terms associated with the types of loans and equity available to a new business:

Debt financing
Equity financing
Grants
SBA Loans

Identify at least one positive and one negative aspect for each of the SBA 7(a) loan programs.

If you were a small business owner, how would you determine which 7(a) option is most appropriate for your needs?

Which of the SBA 7(a) Loans appears to be most beneficial to a small business? Why?

To qualify for financial assistance from the SBA, Jim realizes his application must have positive credit merits. One of the criteria is the relationship between the business's debt and equity. In order to satisfy this criterion, Jim asks his best friend, D.J., for a loan of $20,000, which he promises to repay in six months. Jim then deposits the money from his friend in his own bank and states on the application form that he himself has invested $20,000 in the business as equity. Has Jim violated any ethical principle?

Project Financing

Read the following scenario and answer the questions at the end.

Frank Douglas, a real estate developer, just finalized a major deal with TurnerCounty to develop a major hotel/luxury condominium/golf/conference center/residential mixed-use development on land owned by TurnerCounty.

The development is proposed to include a 150-room five-star hotel, 75 luxury 2,500 sq. ft. condominium units, an eighteen-hole championship golf course, and 360 residential golf course lots.

The total development cost, exclusive of the cost of land and financing expenses, is projected to be $275,000 per room for the hotel, $225 per square foot for the luxury condominium units, $7 million for the golf course, and 11% of the current selling price of $400,000 for each residential lot.

The county has agreed to contribute the land to Mr. Douglas, the developer, at no cost. The county's justification for this contribution is the new jobs, taxes, and new visitors to the area generated by the mixed-use development.

Calculate the total project cost for this mixed-use development from the information provided. In order to get credit for this question you must show all your calculations.

If lenders are willing to provide 60% of the project cost in the form of debt, calculate the dollar amount of debt and equity that Frank Douglas must raise. In order to get credit for this question you must show all your calculations.

Provide a brief explanation of the sources of loans that are available to Mr. Douglas.
Provide a brief explanation of the sources of equity that are available to Mr. Douglas.
Choose one loan source and one equity source and explain why each one is the best option for this development.