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We have the chance to expand our business in a new geographic area. We estimate that the cost of the expansion will be $2 million and we expect to make a 17% return on the costs of our expansion. We are planning on financing the $2 million by using bonds at a market rate of 11% (assume we are tax-exempt for now, so we can simply ignore taxes).

1. What is our return our shareholders will realize from proceeding?

2. Now instead assume we will finance the $2 million required expansion costs with cash and marketable securities that we have on our balance sheet (for simplicity, assume these assets are currently earning nothing). What is the return to our shareholders if we choose this approach to financing our expansion?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M941611

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