ONEFUN is a so-called all-equity company. This company has invested in only one project called LIVE. This project LIVE has expected 2 million dollar cash flow (after-tax) one year from now.

- This cash flow is expected to grow 1% annually forever.

- the risk-free rate of return = 2%

- expected market return = 8%

- project beta = 1.5

ONEFUN wants to raise their leverage to 15%. That would make their cost of debt 2%. We expect that the corporate tax rate is 20%.

1. How would the debt issue affect ONEFUN's cost of equity?

2. How would it affect the WACC?