Your firm has been approached to become an equity participant in a leveraged leasing deal. You need to estimate the minimum rate of return on equity that is acceptable. You have collected the following facts:
• The asset to be leased will cost $100 million, of which 90% will be financed with debt and the remaining 10% with equity.
• The debt portion of the financing is to receive a 14% rate of return before taxes.
• Your tax rate is 40%. The lessor's tax rate is 48%.
• The before-tax rate of return that the lessee will be paying is 18%.
Use the Modigliani-Miller cost of capital assumptions to make your analysis (i.e., assume a world with corporate taxes only)?