Estimate minimum rate of return on equity that is acceptable

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Reference no: EM131245492

Your firm has been approached to become an equity participant in a leveraged leasing deal. You need to estimate the minimum rate of return on equity that is acceptable. You have collected the following facts:

• The asset to be leased will cost $100,000,000; 90% will be financed with debt and the remaining 10% with equity.

• The debt portion of the financing is to receive a 14% rate of return before taxes.

• Your tax rate is 40%. The lessors tax rate is 48%.

• The before-tax rate of return that the lessee will be paying is 18%.

Use the Modigliani-Miller cost of capital assumptions to make your analysis (i.e., assume a world with corporate taxes only).

Reference no: EM131245492

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