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9. A firm has a leverage ratio (debt to assets) of 80% in market value terms. Its equity has a market value of $20 million,
9. A firm has a leverage ratio (debt to assets) of 80% in market value terms. Its equity has a market value of $20 million, and its (perpetual) debt has a yield of 12.5%. There is an investment opportunity requiring an outlay of $20 million, with an NPV of $6 million. Since additional debt is ruled out, equity holders will have to finance the project, if accepted. If the project is accepted, default risk will fall, as a result of which the yield on the firm's debt will fall to 11.5%. (a) Will the project be acceptable to shareholders? Explain. (3 points) (b) What is the minimum project NPV that would make it acceptable to shareholders? (2 points)
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