\ 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