All M\&M assumptions apply to this question. The tax rate is 40%. The risk-free rate is 2.5%, and the MRP is 5\%. CAPM is the correct model for equity returns. After a successful college football career, Tim Turbo partnered with Danny Waffle (naming themselves TD Industries) to manufacture and distribute fruit pies. On 1/1/2023, the company had one product that generated EBIT of $500,000 on 12/31 of each year (forever), with an asset beta of 1.5 and an equity beta of 1.76471 . The firm had $750,000 in debt outstanding (perpetual, interest paid annually) at the risk-free rate of 2.5%. The firm had 100,000 shares outstanding, and all earnings were (and will always be) paid out as dividends. As you can calculate, the firm had a price / share of $25.50. On 1/2/2023 at 8:00a.m., TD announced a new pie product: - The project required that the company spend $500,000 to purchase The Buckeye Grinder 2500 , a buckeye mashing machine. For tax purposes, the machine will not be depreciated since it will last forever. No working capital is required. - To fund the project, $250,000 will be raised as perpetual debt, with an annual coupon rate equal to the risk-free rate, and interest paid annually. The balance of the funds needed will be raised as new equity. - The project increased the company's EBIT by $133,333.33 a year forever (starting on 12/31/2023). - The project had an asset beta of 1.1 . As you can calculate, when the market opened at 9:30 a.m., the price / share fully adjusted to the announcement, selling for $31.50. The company then issued the new shares and debt, and inglamented the project. Search inside image