Question
6. You recently embarked on a journey to pursue your passion for establishing a technology consultancy firm in your hometown. To fund the required
\ 6. You recently embarked on a journey to pursue your passion for establishing a technology consultancy firm in your hometown. To fund the required
$200,000
initial investment, you are exploring various financing options.\ Option A) The initial choice involves fully funding the business with your personal capital, constituting
100%
equity. In this scenario, you estimate a cost of equity at
20%
, and the business would operate without any debt.\ Option B) Alternatively, you can opt to secure a
$50,000
loan from Bank A at an annal interest rate of
12%
. This loan would be supplemented by your remaining investment to meet the total initial cost. In this case, you would contribute
$150,000
of your own capital at a cost of equity of
20%
.\ Option C) Another potential avenue is borrowing
$100,000
from Bank A, at a higher annual interest rate of
16%
. Once again, you would supplement this loan with your personal investment to fulfill the required initial investment. Consequently, you would invest
$100,000
of your own capital at a cost of equity of
20%
.\ Assuming a tax rate of
25%
, what is the weighted-average cost of capital (WACC) in each scenario?\ You expect that the Free Cash Flow of the new company will be
$100,000
in the fir: year, with an expected growth rate of
3%
in perpetuity. What is the Total Value of Operation in each scenario?\ What is the option that will give you the optimal capital structure?
Pedro Monteiro Fall 2023 - A 6. You recently embarked on a journey to pursue your passion for establishing a technology consultancy firm in your hometown. To fund the required $200,000 initial investment, you are exploring various financing options. Option A) The initial choice involves fully funding the business with your personal capital, constituting 100% equity. In this scenario, you estimate a cost of equity at 20%, and the business would operate without any debt. Option B) Alternatively, you can opt to secure a $50,000 loan from Bank A at an annual interest rate of 12%. This loan would be supplemented by your remaining investment to meet the total initial cost. In this case, you would contribute $150,000 of your own capital at a cost of equity of 20%. Option C) Another potential avenue is borrowing $100,000 from Bank A, at a higher annual interest rate of 16%. Once again, you would supplement this loan with your personal investment to fulfill the required initial investment. Consequently, you would invest $100,000 of your own capital at a cost of equity of 20%. - Assuming a tax rate of 25%, what is the weighted-average cost of capital (WACC) in each scenario? - You expect that the Free Cash Flow of the new company will be $100,000 in the fir year, with an expected growth rate of 3% in perpetuity. What is the Total Value of Operation in each scenario? - What is the option that will give you the optimal capital structure
\ 6. You recently embarked on a journey to pursue your passion for establishing a technology consultancy firm in your hometown. To fund the required
$200,000
initial investment, you are exploring various financing options.\ Option A) The initial choice involves fully funding the business with your personal capital, constituting
100%
equity. In this scenario, you estimate a cost of equity at
20%
, and the business would operate without any debt.\ Option B) Alternatively, you can opt to secure a
$50,000
loan from Bank A at an annal interest rate of
12%
. This loan would be supplemented by your remaining investment to meet the total initial cost. In this case, you would contribute
$150,000
of your own capital at a cost of equity of
20%
.\ Option C) Another potential avenue is borrowing
$100,000
from Bank A, at a higher annual interest rate of
16%
. Once again, you would supplement this loan with your personal investment to fulfill the required initial investment. Consequently, you would invest
$100,000
of your own capital at a cost of equity of
20%
.\ Assuming a tax rate of
25%
, what is the weighted-average cost of capital (WACC) in each scenario?\ You expect that the Free Cash Flow of the new company will be
$100,000
in the fir: year, with an expected growth rate of
3%
in perpetuity. What is the Total Value of Operation in each scenario?\ What is the option that will give you the optimal capital structure?
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