You have the opportunity to run a coffee shop in the lobby of a nearby office building
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Question:
- You have the opportunity to run a coffee shop in the lobby of a nearby office building for one year.
- Your research indicates that an upfront investment of $24,000 is required to start.
- After covering your operating costs (including your wage), you expect to generate a cash flow of $34,500 at the end of the year
- Your discount rate is 15%, which is the sum of the risk-free rate of 5% and a 10% risk premium.
Q1) What is the NPV of the investment?
Q2) If you sell your equity to your family and friends to finance the project, how much would they be willing to pay for those shares, given the cash flow estimates?
Q3) If instead, you borrow some of the money and raise the remainder by selling equity, how much money can you borrow risk-free if the cash flows of the business are guaranteed to be at least $16,000?
Q4) Based on your answer to (c), how much can you raise by selling equity in the business now?
Q5) What would be the levered cost of equity?
Q6) Based on your answer to (e), what would be the WACC?
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