Question 1

At the moment Lauren Co. keeps a constant debt-to-equity ratio equal to 1.5, its wacc is 15% and its cost of debt is 1.50%. Moreover the company's debt bears no systematic risk. Lauren is thinking to raise $5,000,000 to acquire the assets for a new, 5 year-long, project. The assets of this new project are as risky as the other assets of the firm.

This new venture will be separated from the rest of the company's operations. As the new project is short-lived, Lauren's management think to keep a constant amount of debt equal to 42% of the initial asset value. The cost of debt for the new project is the same as the cost of the other debt issued by the company. The assets of the project will be depreciated straight line through the life of the project, and the present value of depreciation tax benefits for the first year is 323,040.38. The corporate tax rate is 34%.

What is the expected return on equity for the new project?