Question 4 . Pearson Inc. is currently financed by 30% equity (that is 70%

Question 4

. Pearson Inc. is currently financed by 30% equity (that is 70% debt). Pearson%u2019s operations are marginally
profitability and thus it generates a limited of positive cash flows each year (and in some years the cash flows are negative). Pearson would like to expand
its operations by purchasing two new spas. Should Pearson finance the new spas by equity debt pr a combination of debt and equity? Justify your
recommendations by discussing the advantages and disadvantages of equity and debt financing.

b. Carsom Inc. is financing its new restaurant by borrowing 75% of the cost of the resturant @8%. The rest of the
funds will be obtained from its current shareholders who demand 15% rate of return. Compute Carsom weighted average cost of capital if its tax rate is
40%.