Yum Co, is a private-owned restaurant with a marginal tax rate of 25%, is considering borrowing $25 million to finance the construction of new restaurant 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: 7.5% interest rate for 10 years

Level payment schedule, annual payments at

end of year

Front end fees of $50,000

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