Scenario: You are an angel investor who has been approached by an entrepreneur to assess an investment opportunity. An e
Posted: Mon May 02, 2022 9:45 am
Scenario: You are an angel
investor who has been approached by an entrepreneur to assess
an investment opportunity.
An entrepreneur asks for $100,000 to purchase a diagnostic
machine for a healthcare facility. The entrepreneur hopes to
maintain as much equity in the company as possible, yet as the
angel investor, you require the transaction to be financed with 60%
debt and 40% equity.
As the angel investor, you assign a cost of equity of 16% and a
cost of debt at 9%. Based on Year 1 sales projections, the
entrepreneur assures you a return on investment (ROI) of 9%;
conceptually this will cover the first year’s pretax cost of debt
and allow for planned equity growth and a refinancing model for
Year 2. You will use an after-tax weighted average cost of capital
(AT- WACC) model, which includes the after-tax cost of debt and
proportionate costs of debt versus equity. A 35% marginal tax rate
is applied.
investor who has been approached by an entrepreneur to assess
an investment opportunity.
An entrepreneur asks for $100,000 to purchase a diagnostic
machine for a healthcare facility. The entrepreneur hopes to
maintain as much equity in the company as possible, yet as the
angel investor, you require the transaction to be financed with 60%
debt and 40% equity.
As the angel investor, you assign a cost of equity of 16% and a
cost of debt at 9%. Based on Year 1 sales projections, the
entrepreneur assures you a return on investment (ROI) of 9%;
conceptually this will cover the first year’s pretax cost of debt
and allow for planned equity growth and a refinancing model for
Year 2. You will use an after-tax weighted average cost of capital
(AT- WACC) model, which includes the after-tax cost of debt and
proportionate costs of debt versus equity. A 35% marginal tax rate
is applied.