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Question
Bobbys Bar B Q Shack is a rapidly expanding chain of fast and casual restaurants. The chain currently owns ten locations. Each location costs $5 million to build and generates a stabilized operating profit of $ 1 million per year. The company would like to build 20 more over the next year and assumes its costs will remain the same. Bobby has been offered a $75 million three-year bank line of credit at 10% and a $75 m three year 6% convertible mortgage. The convertible mortgage allows the holder to convert $25 million of principal into a 20% interest in the company. The market values companies like Bobbys at 10 times unit operating profit. Which financing is better?
Answer
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