The Right Mix- Debt vs. Equity

The Right Blend Week 3 of Finance 325 required students to complete the simulation titled "Determining the Debt Equity Mix: The Right Blend." This simulation asked students to work through various stages of a newly started exotic coffee shop, while determining the right debt-equity combination and optimal Weighted Average Cost of Capital (WACC). Students were given ownership of an extremely popular coffee shop named, "El Café." The shop is located in the very diverse community …

…Café" coffee chain. Understanding and utilizing the Weighted Average Cost of Capital (WACC) was very beneficial to the questions being asked of students. It is crucial to this lesson that students understand the concept that the more debt an organization finances to lower the WACC, the higher the chance of potential bankruptcy in the future. Being able to identify the ideal mix of debt to equity is they key to any business' success.