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5. ABC has a target debt ratio of 40% and it keeps this target. the cost of equity is 10% and the cost of debt
5. ABC has a target debt ratio of 40% and it keeps this target. the cost of equity is 10% and the cost of debt is 4%. its considering expanding its business and requests $1 million investment. After expansion ABC expects additional free cashflows of $0.2 million per year in perpetions ABC decides to issue equity of finance this expansion. The equity insurance cost is 5%. Tax is 30%. Assume that ABC will maintain the target debt ratio.
what is the NPV?
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