A restaurateur provides you with the following information for you to calculate the cost of debt and equity for her business venture: 1. She borrows $100,000 from a bank and agrees to pay the bank interest expense of $10,000 per year. 2. She raises another $100,000 of equity from an investor and agrees to give him a 50% ownership position in her restaurant. 3. Projected annual cash flow before debt service is $50,000. What is the projected cost of debt and cost of equity? The annual cost of debt is 10% and is calculated as follows: $10,000 (interest expense) divided by $100,000 (loan principal) = 10% The annual cost of equity is 17% and is calculated as follows: $50,000 (annual cash flow before debt service) less $16,000 (debt service) = $34,000 $34,000 50% (investor ownership) = $17,000 (net cash flow to your investor) $17,000 (net cash flow to your investor) divided by $100,000 (equity invested) = 17%