Cost of Capital Models
The concept of after-tax Weighted Average Cost of Capital (WACC) is a common issue when studying finance at all levels. The impact of taxes, applicable to most forms of financing is a key component of studies in the field of finance. The Assessment questions will present the opportunity to assess and build upon your knowledge of and ability to calculate the after-tax WACC and the cost of debt and equity. Read the fictional scenario and respond to the checklist items in this written Assessment. Scenario: As an Angel Investor you have been asked to assess an entrepreneur’s product and financing options. In your role as an Angel Investor you focus on one year at a time. The entrepreneur asks for $100,000 immediately to purchase a diagnostic machine for a healthcare facility. The entrepreneur hopes to be financed with 60 percent debt and 40 percent equity. As the entrepreneurs’ venture capital partner, you assign a cost of equity of 15% and a cost of debt at 10%. [unique_solution]You require a Return on Investment (ROI) of 8%. You are using an After Tax Weighted Average Cost of Capital (AT- WACC) model. A 35% marginal tax rate is applied Address the following checklist items: Checklist: • Explain the tax benefits of debt financing. • Calculate the AT- WACC with a 60% debt and 40% 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 what the entrepreneur’s financial restructuring AT- WACC (% Debt and % Equity) need to be in order to 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 nature of the claims on assets in times of a bankruptcy. • Submit your response in a minimum of a 2-page APA formatted Microsoft® Word® document to the Dropbox with additional title and references pages. Access the rubric Minimum Submission Requirements • Address all the checklist items. • Include a strong thesis statement, introduction, and conclusion. The main points of the response should be developed and explained clearly in the denial letter with appropriate financial and accounting terminology. • Your content should follow proper APA citation style. For assistance with APA formatting, go to the Writing Resources accessed through the Academic Success Center within the Academic Tools area of the course. APA formatting dictates that your paper includes a cover sheet (i.e., title page), the paper is double spaced, in Times New Roman 12-point font, with correct citations, uses Standard English with no spelling or punctuation errors.