Question
Suppose that harry Industries is considering a project in its industry for $50 million which it will fund entirely with debt at 6% interest. The
Suppose that harry Industries is considering a project in its industry for $50 million which it will fund entirely with debt at 6% interest. The acquisition is expected to increase Harry's free cash flow by $7 million the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Harry currently maintains a debt-to-equity ratio of 1 but with the new debt, the ratio will rise to 1.3. The company's marginal tax rate is 35%, and its current cost of equity is 10%. After making this investment, Harry's cost of equity will be closest to:
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