An equity-only firm is valued at $500 million and has a beta of 1.1.

One of its suppliers has asked the firm for a 1-year loan. The supplier wants to borrow $60 millon and pay back $62.1 million next year.

The risk-free rate is 3% and the equity premium is 4%.

Part1

Without the loan and assuming constant cash flows, what is the expected cash flow per year?

Part2

What is the value of the firm with the loan (in $ million)?

Part3

What is the new cost of capital after extending the loan