Calculate the AT-WACC

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Question - Entrepreneur asks for $100,000 to purchase a diagnostic machine for a healthcare facility. The entrepreneur hopes to maintain as much equity in the company as possible, yet as the angel investor, you require the transaction to be financed with 60% debt and 40% equity.

As the angel investor, you assign a cost of equity of 16% and a cost of debt at 9%. Based on Year 1 sales projections, the entrepreneur assures you a return on investment (ROI) of 9%; conceptually this will cover the first year's pretax cost of debt and allow for planned equity growth and a refinancing model for Year 2. You will use an after-tax weighted average cost of capital (AT- WACC) model which includes the after-tax cost of debt and proportionate costs of debt versus equity. A 35% marginal tax rate is applied. Calculate the AT-WACC with a 60% debt and 40% equity financing structure. Show all Work or this problem.

Reference no: EM132921289

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