Question
Eli is expanding his restaurant. With the current low interest rate, he is looking at financing this project with a 60% debt and 40% equity.
Eli is expanding his restaurant. With the current low interest rate, he is looking at financing this project with a 60% debt and 40% equity. The tax rate is 30%. For the debt portion, he is planning to issue a bond with a 6.5% coupon for 8 years. And with the current market condition, he believes the bonds can easily be sold at a premium price of $1,105 per bond. His cost of equity can be estimated using the Capital Asset Pricing model. The T-bill rate is at 1.5% and the market rate is at 8%. Since Elis place is fairly new and is considered a bit risky, its beta is 1.5. What would be Elis "cost of debt"?
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