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    Financing decision

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    Your boss is considering borrowing $10,000 from a bank at 8% for a project.
    She has determined that the rate of return on the project is expected to be 12%. She
    comments that since the project is earning more than the cost of the debt, it should
    definitely be undertaken. You assert that the company's average cost of capital is
    13% and the project should not be undertaken. Surprised with your assertiveness she
    replies, "I don't care about the average cost of capital. I am only using this debt to
    finance the project. Since this debt only costs 8%, and the project should earn 12%,
    it will be profitable!!" Defend your assertion that the project should not be

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    Solution Preview

    The financing decision determines the financial risk of the business. In general the greater proportion of long term debt in the capital structure of the firm the greater is the financial risk ...

    Solution Summary

    This solution explains the concept of financing decision.