Chelsea Ltd is a company that is listed on the NYSE. It is currently financed by equity only. Chelsea is currently financed by $$1000000$ equity. Management wants to expand the company by investing a further $$1000000$ in a project. The project promises to pay an expected return of $$400000$ before tax. The shareholders currently require a return of $20\%.$ The cost of debt is $25\%$ before tax. The tax rate is $40\%.$

Required:

Compare and contrast the required return to the shareholders when the investment is financed by debt as opposed to new equity finance. $(6$ marks$)$

NB: Support your answer with calculations. No marks will be awarded if calculations are not used to support your answer.