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The total market value of Biz Tech shares is $60 million, and the total market value of its debt is $40 million. The treasurer estimates that the beta of the shares is currently 1.5. The expected risk premium on the market is 8%. The risk- free rate on the Treasury securities is 5%. Biz Tech's debt requires a credit spread of 1% above the risk-free rate. The company's tax rate is 30%s.
1. What is the required rate of return on the Biz tech shares?
2. Estimate the company's cost of capital.
3. The company has an expansion plan that requires $10 million initial investment. The net cash flow from the project is estimated at $2 million per year for 15 years, beginning at year 3. Should the company take the project or not? Assume that the company maintains its current capital structure throughout the expansion. Also, note that the net cash flow is already on the after-tax basis.
If the required return is 18 percent, what is the project's equivalent annual cost, or EAC? (Do not round your intermediate calculations.)
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