Consider a perpetual project.Initial investment is 1M euros and expected cash flows 95000 euros in perpetuity. The opportunity cost of capital with...
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Consider a perpetual project.Initial investment is 1M euros and expected

cash flows 95000 euros in perpetuity. The opportunity cost of capital with all equity financed is 10% and the project allows the firm to borrow at 7%. Corporate tax rate is 35%. Use APV to calculate project's value.
a) Assume that the project will be partly financed with 400000 euros of debt and that the debt amount is to be fixed and perpetual
b) Then assume that the initial borrowing will be increased or reduced in proportion to changes in the market value of this project.
Explain the differences between a and b

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Step-by-step explanation

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