If a firm takes on more debt, does it have an effect on cost of equity? Explain [5] XYZ Corp, has 10 million shares of common stock outstanding. The common stock currently sells for $50 per share and has a beta of 1.5. XYZ Corp. has 290,000 bonds outstanding and sell for 105% of par value. The ytm (yield to maturity) of the bond is 6% pa. The market risk premium is 7%. T-bills are yielding 4% pa and corporate tax rate is 25% All p.a. rates are EAR. What is the firm's market value capital structure (ie. Market value of debe Market value of equity)? What is the firm's cost of capital? If XYZ Corp. is evaluating a new investment project that be an investment of $10 million at year and expected to have a cash flow of 55 million from Year 1 onwards growing at 5% ratepa, forever, what is the NPV of the project? 151