Evaluate the cost of equity for a private company.

Suppose you are an angel investor, and you are provided with a private firm, Innovative Solutions Inc., that is currently seeking angel investment. This firm is in the startup stage. The company has ambitious plans to disrupt the market with its cutting-edge technology. However, as with many startups, their business plan shows signs of Venture Hubris, with overly optimistic projections that seem to ignore the possibility of failure or underperformance. Task Your task is to evaluate the cost of common equity (re) for Innovative Solutions Inc. using the provided financial data and taking into account the absence of beta in the following formula: rv=re+AP+LP+HPP where: - rv = rate of return for venture investors - re = cost of common equity - AP= advisory premium - LP = liquidity risk - HPP = hubris projections premium 1. Cost of Common Equity (re): Since the firm is private and has no beta, we estimate the cost of common equity by considering the firm's industry average returns (using the average of public firms), its past financial performance, and the risk associated with its specific business model. For this case, let's assume an industry average return of 10%, and due to Innovative Solutions Inc.'s solid past performance and moderate business risk, we adjust this by only +2% for performance and only +3% for specific risk. That is, our rv=15% Question 1: Please explain in detail why rv for it (i.e., a private firm) is much greater than the re for the average public firm in the same industry? 2. Advisory Premium (AP): Given the need for specialized advisory services for this tech startup, we assign a premium of 5%. Question 2: Please explain in detail what does Advisory Premium (AP) mean here? 3. Liquidity Risk (LP): Due to the difficulty in selling shares of a private firm, we assign a liquidity risk premium of 8%. Question 3: Do you agree with this percentage? Please provide your reasons. 4. Hubris Projections Premium (HPP): Considering the optimism in the business plan, we assign a conservative hubris premium of 5%. Question 4: In simple words, explain why Hubris Projections Premium is almost always charged to a private business? Now, plugging these values into the formula, we calculate the expected rate of return for venture investors (rv): Question 5: Calculate rv, and discuss whether it is high/low for a typical private firm in startup stage? (remember, usually startup stage firms have a COE of 40%60)