Show Work, Please. Excel Preferably. Suppose you are consideringinvesting in a new business that will cost $10 million. A bank iswilling to lend you $7 million for the purchase with equity holdershaving to provide the remainder of the funds. the terms of the loanare: a 20-year loan with yearly payments at a fixed rate of 3%. Youwill sell the business after year 8. You estimate the business willhave the following profits in years 1-8: $100,000 in year 1,$300,000 in year 2, and $400,000 year 3 through year 8. In year 8,and advisor tells you that given the expectation of increasedcompetition that the business will likely only sell for $15 millionat the end of year 8( ignore any tax issues).
a.) Calculate the return to equity holders if they provide thefunds that the bank does not provide.
b.) Now that your equity investors have heard about the \"evilsof leverage\" and refuse to borrow any money from the bank,calculate the return assuming equity holders put up the entire $10million purchase price.
c.) Based upon your answers in a) and b), what are the benefitsof leverage( borrowing money to finance purchase)? What otherbenefits of leverage are there to investors? Why might leveragingbe bad?
