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Unformatted text preview: Total: 627,360 WACC=E/V*Re+STD/V*(1-t)*Rd_ST+LTD/V*(1-t)*Rd_LT=10.40% 4. WACC=7%*(1-0.35)*0.4+0.14*0.6=10.22% NPV=-1,000,000+130,000/10.22%=272,016 The issue costs are: Stock issue: (0.05*1,000,000)=$50,000 Bond issue: (0.015*1,000,000)=$15,000 Debt is less expensive. Project’s APV is 272,016- 15,000=257,016. However, if the debt is used, the firm’s debt ratio will be above the target ratio and more equity will have to be raised later. If no fixed cost with issuance, to keep firm at their optimal debt level, firm should issue 40% debt and 60% equity. Cost would be 0.015*1,000,000*40%+0.05*1,000,000*60%=36,000 The project’s APV is 272,016-36,000=$236,016 The cost of debt and equity are not 8.5% and 19%, respectively. These figures assume the issue costs are paid every year, not just at issue....
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