For your company you need to raise $ 4 M. You estimate existing equity to be $ 1 M. If you issue $ 4 M of equity (so the total equity will be $ 5M), then the required cost of equity will be 16%. Alternatively you can issue a combination of equity and debt. Your bank gave you the following quote for different levels of debt (see below). Your tax rate is 35%

a) Please estimate WACC for each level of debt

b) How much money should you borrow?

c) Why is the debt interest rate increasing with amount of debt? Explain

Amount needed	$ 4,000,000
Existing equity	$ 1,000,000
Tax rate	35%
Cost of equity (unlevered)	16%
Interest rate table
Amount borrowed	Interest rate
$ 500,000	6.00%
$ 1,000,000	7.00%
$ 2,000,000	8.00%
$ 3,000,000	10.00%
$ 4,000,000	12.00%
							Score	Maximum Score
a) Please estimate WACC for each level of debt								10
Debt	Equity	Debt/Equity	Debt/Value	Interest rate	After tax cost of debt	Cost of equity	WACC
$ -				0.00%		16%
$ 500,000				6.00%
$ 1,000,000				7.00%
$ 2,000,000				8.00%
$ 3,000,000				10.00%
$ 4,000,000				12.00%
b) How much money should you borrow?								4
Optimal borrowing
c) Why is the debt interest rate increasing with amount of debt? Explain								6