1) Suppose you borrow $65000 when financing a coffee shop which is valued at $120000. Assume that the unlevered cost of capital for the coffee shop is 7.5% and that the cost of debt is valued at 5%. What should be the cost of equity of your firm?
2) ECB borrows $1750000 USDs by issuing 4-year bonds. ECB's cost of debt is 5.5%, so it will need to pay $96250 USDs in interest each year for the next 4 years, and then repay the principal $1750000 USD in year 4. ECB's marginal tax rate will remain 35 throughout this period. By how much (in USDs) does the interest tax shield increase the value of ECB?