Margaret Woods Clinic, LLC, is a physician-owned clinic with a marginal tax rate of 30%, is considering borrowing $25 million to finance the construction of new clinic facilities. The following information may be relevant to the decision:

Total Debt (prior to project financing) = $10 million

Total Equity = $18 million

Required return on equity = 10%

Cost of bank mortgage:

7% interest rate for 10 years. Level payment schedule, annual payments at end of year. Front end fees of $50,000

In order to make the decision, you should:

1. Develop the repayment schedule, separating principal and interest

2. Determine the net cash flows of the loan

3. Calculate the effective interest rate on the loan

4. Assess the effect of the borrowing on overall cost of capital of MWC

Pease note that there are actually two issues: (1) the net interest rate on the loan and (2) the effect of taking on the debt on the WACC