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e. t-'ery risky stocks on the average grye higher returns than sate stocks. World Cellfone Co. is considering the purchase of a new.r telecommunications system
e. t-'ery risky stocks on the average grye higher returns than sate stocks. World Cellfone Co. is considering the purchase of a new.r telecommunications system for $60 million This system will boost the rm's productivity so that its operating earnings will increase by $12 million per year over the next 3 years. World Cellfone Co. corporate tart rate is 35% and its debt and equity costs are Th} and 14%: respectively. The manufacturer of the telecommunications system is willing to loan the firm $25 million hr the pinchase at a subsidized rate of 5% (with World Cellfone Co. putting up the remainder from its retained earnings account}. The loan principal is to be paid off in 5 equal installments oyer 5 years smith interest being paid eyery year on the loan outstanding Ifthe rm's required rate of return under all-equity nancing is l'h'h should it go ahead with the purchase
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