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Dewey, Cheatem, and Howe, a leading publisher of finance textbooks, currently has the following capital structure. = market value of debt face value of debt
Dewey, Cheatem, and Howe, a leading publisher of finance textbooks, currently has the following capital structure. = market value of debt face value of debt market value of equity beta of debt beta of equity = 375,000 500,000 625,000 0 1.6 Suppose the firm is considering a new edition of its Principles of Corporate Finance textbook. The following are expected marginal cash flows: Period 0 Expected cash flows -100,000 +100,000 +200,000 1 2 Assume that the firm can borrow 100,000 to finance the project at competitive terms, which involves promising to repay 120,000 in year two, with no intermediate interest payments. Assume no taxes. Other information: expected market return = 13%/year riskless rate of interest = 3%/year correlation between new project cash flows and company's other projects = 1 (A) What is the firm's cost of capital before the project? After the project? (3 pts) (B) What is the market value before the project is taken? After? (5 pts)
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