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Question - Merry Electronics Corporations is currently at its target debt equity of 0.5:1. It is considering a proposal to expand capacity which is expected to cost Rs. 500 Million and generate after tax cash flows of Rs. 130 Million per year for the next eight years. The tax rate for the firm is 30 percent. Ramesh, the CFO of the Company, has considered to financing options:
(i) Issue of equity shares, the required rate on the company's new equity is 20% and the issuance cost shall be 12%.
(ii) Issue of debentures at a coupon rate of 13%. The issuance cost will be 3%. You are required to calculate the following:
(a) What is the Cut-off Rate (WACC) of the Merry Electronics Corporations?
(b) Discuss the feasibility of project using the NPV technique supported by your detailed calculation.
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