A restaurateur provides you with the following information for you to calculate the cost of debt...

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A restaurateur provides you with the following information for you to calculate the cost of debt and equity for her business venture: 1. She borrows $100,000 from a bank and agrees to pay the bank interest expense of $10,000 per year. 2. She raises another $100,000 of equity from an investor and agrees to give him a 50% ownership position in her restaurant. 3. Projected annual cash flow before debt service is $50,000. What is the projected cost of debt and cost of equity? The annual cost of debt is 10% and is calculated as follows: $10,000 (interest expense) divided by $100,000 (loan principal) = 10% The annual cost of equity is 17% and is calculated as follows: $50,000 (annual cash flow before debt service) less $16,000 (debt service) = $34,000 $34,000 50% (investor ownership) = $17,000 (net cash flow to your investor) $17,000 (net cash flow to your investor) divided by $100,000 (equity invested) = 17% A restaurateur provides you with the following information for you to calculate the cost of debt and equity for her business venture: 1. She borrows $100,000 from a bank and agrees to pay the bank interest expense of $10,000 per year. 2. She raises another $100,000 of equity from an investor and agrees to give him a 50% ownership position in her restaurant. 3. Projected annual cash flow before debt service is $50,000. What is the projected cost of debt and cost of equity? The annual cost of debt is 10% and is calculated as follows: $10,000 (interest expense) divided by $100,000 (loan principal) = 10% The annual cost of equity is 17% and is calculated as follows: $50,000 (annual cash flow before debt service) less $16,000 (debt service) = $34,000 $34,000 50% (investor ownership) = $17,000 (net cash flow to your investor) $17,000 (net cash flow to your investor) divided by $100,000 (equity invested) = 17%

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To calculate the cost of debt and the cost of equity for the restaurateurs business venture 1 Cost ... View the full answer