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A firm 's targe t capital structure is 60 percent debt and 40 percent common equity. The firm's common stock has just paid a dividend

A firm

's targe

t capital structure is

60

percent debt and

40

percent common equity. The

firm's common stock has just paid a dividend of $2 per share. It is expected that the

dividends of this firm will grow at a rate of 10 percent per year in the future. The current

p

rice of the common shares is $3

0

. If new common shares are issued, it will be

necessary to

incur flotation costs of $5 per share

. The firm's bonds have a par value of

$1,000

;

a

coupon rate of

7

percent

paid annually

;

10 years to maturity

;

and currently s

ell

for $1,0

5

0 each. Flotation costs on

similar

new bonds would be

4

percent of the par

value on an after

-

tax basis. The firm is considering a project with an investment of $

10

million. The firm

doesn't have enough cash

for the investment

and will have

to issue

common shares to raise the $

10

million.

What is the required

rate of

return on this investment if the firm's tax rate is

40

percent

and the project has the same level of risk as the firm?

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