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Problem:

Sarah Scott borrowed $200,000 from a bank to start a catering business and has agreed to pay the bank $15,000 per year in interest expense.

1. What is the cost of debt for Sarah?

2. If Sarah raises another $100,000 of equity from her sister Allison, agrees to give her a 25% ownership position in her catering business, and projects annual cash flow before debt to be $50,000, what is Sarah's cost of equity?

3. What is the weight of debt for Sarah's catering business?

4. What is the weight of equity for Sarah's catering business?

5. If Sarah's business falls in the 30% tax bracket, what is her cost of debt after tax?

Describe in detail and provide all workings and methods.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91147171

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