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How would the debt issue affect onefun

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Reference no: EM133110226

ONEFUN is a so-called all-equity company. This company has invested in only one project called LIVE. This project LIVE has expected 2 million dollar cash flow (after-tax) one year from now. This cash flow is expected to grow 1% annually forever.

- the risk-free rate of return = 2%

- expected market return = 8%

- project beta = 1.5

ONEFUN wants to raise their leverage to 15%. That would make their cost of debt 2%. We expect that the corporate tax rate is 20%. 

  1. How would the debt issue affect ONEFUN's cost of equity? 
  2. How would it affect the WACC? 
  3. How much would ONEFUN's value (20 million) because of the debt issue? 
  4. When ONEFUN's management announces the new capital structure to shareholders, what announcement return would you expect?

Reference no: EM133110226

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