Question
1. Alicia borrowed $300,000 from a bank to start a catering business and has agreed to pay the bank $20,000 per year in interest expense.
1. Alicia borrowed $300,000 from a bank to start a catering business and has agreed to pay the bank $20,000 per year in interest expense. What is the cost of debt for Alicia? 2. If Alicia raises another $100,000 of equity from her sister Dorothy, agrees to give her a 20% ownership position in her catering business, and projects annual cash flow before debt to be $60,000, what is Alicias cost of equity? 3. What is the weight of debt for Alicias catering business? 4. What is the weight of equity for Alicias catering business? 5. If Alicias business falls in the 30% tax bracket, what is her cost of debt after tax? 6. What is the weighted average cost of capital for Alicia?
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