The simulation that will be discussed in this document concerns the decisions that the owner of a bar must make to expand your own business. The name of the shop is El Café and it is located in Minnesota. The owner has decided to expand the business because it is becoming profitable and expanding the business is the next logical step. There is a rich uncle who is willing to help the owner by allowing him to use his liquidity. Below will be a brief discussion on the importance of weighted average cost of capital (WACC) and the impact WACC has on budget and capital structure. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay For the first scenario, the owner must raise $400,000 in matching financing to expand operations of two stores. The scenario requires you to decide whether to get a zero-tax debt and low-interest loan or use the equity that Uncle Jorge owns in the company. The decision was made on the debt-equity mix to make 70% debt and 30% equity. With this decision we achieved the lowest WACC of 8.65%. By doing so, it also allowed the company not to put too much leverage on the company with too much debt. Otherwise the company would earn a substantial portion of its earnings by satisfying high debt obligations. In the second scenario, four years have passed and the company is looking to expand to other cities. This would accelerate growth and create a market for the company. The decision to make is how many cities to expand to and what source of financing to use. The decision was made to expand to 7 cities with debt to ensure the expected rate of return was higher than the WACC. Choosing debt financing lowered the WACC, but it was still a better decision to opt for debt. The reason was to decrease taxable income due to the increase in debt. Using the tax shelter was the best option to take because the company was doing well financially. For the final scenario, there is a large amount of debt accumulated in scenario 2 and the company has financial problems. If there is no reduction in debt, the company will have to declare bankruptcy and will be put up for sale. The decision that will need to be made is to determine whether a debt exchange, an asset sale or possibly a loan renegotiation is appropriate. The decision was made to convert 25% of the debt into equity, which allowed the company to reduce the debt amount of the capital structure by one-third of the original debt amount. It was also decided to sell the real estate assets because in the future the company will be able to rent the land again. As for renegotiations, it would be very difficult to negotiate more than 25% of the loan because this would have placed a greater burden on the company due to the lenders charging higher rates in the future. When looking at WACC, it is important to understand what it is. It is recognized as one of the most critical parameters in strategic decision making. It is relevant for business valuation, capital budgeting, feasibility studies and corporate finance decisions. When estimating WACC for a company, there is a clear trade-off between rough estimates and actual circumstances faced by the company. The decision should reflect the real environment in which a company operates. (McLure, 2003) To understand the weighted average cost of capital, you need to understand what story it tells. Capital financing.