Reference no: EM133205273
Please Address Each Number
You are an angel investor who has been approached by an entrepreneur to assess an investment opportunity.
An 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.
1. Explain the tax benefits of debt financing.
2. Calculate the AT-WACC with a 60% debt and 40% equity financing structure.
- Integrates data to calculate it.
3. Apply the calculated AT-WACC to explain why this is or is not a viable investment for you as the angel investor.
4. Explain a financial restructuring AT-WACC (given changes to proportions of % debt versus % equity financing) that would develop into a positive ROI.
5. Explain why you as the angel investor would require more or less debt versus equity financing. Be sure to note the role of the Unified Commercial Code-1 (UCC-1) document in this transaction and the order of claim on assets in times of a bankruptcy.