The company wishes to enter a new project which will return £2m each year before interest charges. The project will cost £6m and will be financed using debt at a rate of 8%. If ABC plc enters into the project the cost of equity will increase to 14%.
ABC plc is financed by both debt and equity. Its cost of equity is 12% and the cost of debt 8% and its weighted average cost of capital is 10.5%. The company pays out all its profits as dividends and
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