Cost of Capital Models

COST OF CAPITAL MODELS
THE ANGEL INVESTOR
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COST OF CAPITAL MODELS
Introduction
An entrepreneur is seeking an investment of $ 100,000 for funding a diagnostic machine
purchase for a healthcare facility. The proposed capital structure for the funding would be 60%
debt while the remaining 40% through equity. The entrepreneur has approached an angel
investor for making investment in the project. The minimum ROI expected by the angel investor
is 8%. The objective of the given report is to carry out an analysis of the given situation to
determine whether the angel investor is likely to provide the funding or not considering the cost
of capital.
Analysis
The various aspects in regards to the given scenario are discussed below.
Tax Benefits related to Debt Financing
One of the key advantages of debt financing is the related tax benefit. This arises
primarily on account of interest expense which is paid on the debt and thereby is an operating
expenses which tends to lower the taxable income. This results in lower tax outflow for the
company and part of the incremental tax expenses is compensated through tax savings.
After Tax WACC Computation
Cost of equity is given as 15%
Cost of debt is given as 10%
Post tax cost of debt = 10%(1-0.35) = 6.5%
Weight of equity = 40%
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