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RedBerry Inc. is considering the launch of a new subsidiary in China as they believe that they will be able to generate great profits in

RedBerry Inc. is considering the launch of a new subsidiary in China as they believe that they will be able to generate great profits in this thriving economy in the next 10 years. They have spent $1,050,000 in research on this new project and they would like to estimate the value that this undertaking will add to the entergrise. RedBerry does not believe that this new project will add any significant risk to the cuttent operations.The new division is expected to generate $3 million in revenue each year and generate a profit margin of 30%. There will also be an upfront investment in equipment of $600,000 which will depreciate on a straight line basis, and an initial working capital investment of $150,000 is required.The liabilities and shareholders' equity extract of the most recent balance sheet is as follows(Ir thousands)Current Liabilities-50000Debt-100000Equity300000Total Liabilities and stockholders equity-450000The company has an issued share capital of 35 million shares which are currently being sold on the market for $4 per share. The Company currently carries 12 percent sem-annual coupon bonds issued at par on its books. The bonds are due to mature in 20 years and currently sell for 86% of face value.Additionalinformation is provided below.The company's stock is 1.4 times as risky as the market stockalThe T-bill rate in the market is 10 percent, and there is a market risk premium for the stock ot 5 percentThe company's marginal tax rate is 40 percent.Calculate the after-tax cost of debt without use of a financial calculator

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