For your company you needto raise $4 M. You estimate existing equity to be $ 1 M.

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Question:

For your company you needto raise $4 M. You estimate existing equity to be $ 1 M. If you issue $ 4 M of equity (so the total equity will be $ 5M), then the required cost of equity will be 16%. Alternatively you can issue a combination of equity and debt. Your bank gave you the following quote for different levels of debt (see below). Your tax rate is 35%

a) Please estimate WACCfor each level of debt

b) How much money should you borrow?

c) Why is the debt interest rate increasing with amount of debt? Explain