You are thinking of buying a startup for $40 million. The company will generate free cash flows of $6 million per year forever. You can take out an interest-only loan with an interest rate of 6%. The loan does not require any principal repayments and will go on forever. The weighted average cost of capital is 14% and the tax rate is 35%.

a) How much of the $40 million should you borrow to achieve an internal rate of return of 30% on your equity investment?

b) How much of the $40 million should you borrow to achieve an internal rate of return of 80% on your equity investment?