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What is the cost to current shareholders of financing

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Reference no: EM132683867

Axon Industries needs to raise $77M for a new investment project. If the firm issues one-year debt, it may have to pay an interest rate of 12%, although Axon's managers believe that 8% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 14%.

a.What is the cost to current shareholders of financing the project out of debt?

b.What is the cost to current shareholders of financing the project out of Equity?

c.What should be the undervaluation of equity to match the cost of debt?

Reference no: EM132683867

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