Scenario: You are an angel investor whom an entrepreneur has approached to assess an investment opportunity.

An entrepreneur asks for $$100,000$ to purchase a diagnostic machine for a healthcare facility. The entrepreneur hopes to maintain as much equity in the company as possible. Yet, the angel investor began negotiations, saying he wanted the transaction to be financed with $50\%$ debt and $50\%$ equity.

As the angel investor, you assign a cost of equity of $14\%$ and a cost of debt at $10\%.$ Based on Year $1$ sales projections, the entrepreneur assures you a return on investment $($ROI$)$ of $9\%$; conceptually, this will cover the first year's pretax cost of debt and allow for planned equity growth and refinancing model for Year $2.$ You will use an after$-$tax weighted average cost of capital $($AT$-$ WACC$)$ model, including the after$-$tax cost of debt and proportionate costs of debt versus equity. A $32\%$ marginal tax rate is applied.

Address the following checklist items.

Checklist:

Explain the tax benefits of debt financing.

Calculate the AT$-$WACC with a $50\%$ debt and $50\%$ equity financing structure.

Apply the calculated AT$-$WACC to explain why this is or is not a viable investment for you as the angel investor.

Explain a financial restructuring AT$-$WACC $($given changes to proportions of percent debt versus percent equity financing$)$ that would create a positive ROI.

Explain why you, as the angel investor, would require more or less debt versus equity financing. Be sure to note the role of the Unified Commercial Code$-1($UCC$-1)$ document in this transaction and the order of claim on assets in times of bankruptcy.

Include a strong thesis statement, introduction, and conclusion. The main points of the response should be developed and explained clearly with appropriate financial and accounting terminology.