Assignment: The Angel Investor
In this assignment, you will be assessed based on the following Course Outcome:
MT480-6: Incorporate the combined attributes of debt and equity given a cost of capital model.
The concept of after-tax weighted average cost of capital (WACC) is a foundation when assessing cost of capital and investment options. The assignment will present the opportunity to assess a financing transaction and build upon your understanding of this cost of capital concept and demonstrate your ability to calculate the after-tax WACC.
Read the scenario and address the checklist items below.
Scenario: 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.
Address the following checklist items:
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