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Detroit acquired Dearborn. No equity was used. Instead, only Bond financing was used for the 100% cost of acquisition. After-tax YTM of the issued Bond

Detroit acquired Dearborn.

No equity was used. Instead, only Bond financing was used for the 100% cost of acquisition.

After-tax YTM of the issued Bond = 9.50%

WACC (based on current capital structure) = 16.00%

WACC (based on target capital structure) = 14.00%

Which is the correct discount rate to be used for valuing this project?

[No computations needed. Good to think it over!]

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