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Axon Industries needs to raise $23
Axon Industries needs to raise $23.46M for a new investment project. If the firm issues one-year debt, it may haveto pay an interest rate of 9.13 %, although Axon's managers believe that 5.52 % would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 9.32 %. What is the cost to current shareholders of financing the project out of debt?
NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.0000, etc.
Expert Solution
Computation of Cost to Current Shareholders of Financing the Project out of Debt:
Total Cost = Principal*(1+Interest Rate)
= $23.46M*(1+9.13%)
Total Cost = $25.60M
Present Value of Total Cost = Total Cost/(1-Fair Rate)
= $25.60M/(1+5.52%)
Present Value of Total Cost = $24.26M
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