5. Issue costs and WACC (15 points) The Marvin Corp. is currently at its target debt ratio of 50%. It is contemplating a $1 million expansion of its existing business. This expansion is expected to produce a cash inflow of $150000 a year in perpetuity. Company tax rate is 30 %. The company is uncertain whether to undertake this expansion and how to finance it. The two options are a $1 million issue of common stock or a $1 million issue of 20-year debt. The flotation costs of a stock issue would be around 6% of the amount raised, and the flotation costs of a debt issue would be around 2%. Rockettech's financial manager, estimates that the required return on the company's equity is 15%, but argues that the flotation costs increase the cost of new equity to 21%. On this basis, the project does not appear viable. On the other hand, she points out that the company can raise new debt on a 8% yield, which would make the cost of new debt 10%. She therefore recommends that Rockettech should go ahead with the project and finance it with an issue of long-term debt. Is the financial manager right? How would you evaluate the project, considering that the project has the same business risk as the firm's other assets