FSB Ltd has a new project under consideration which will cost $10,000,000. The project is expected to generate before-ta

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FSB Ltd has a new project under consideration which will cost
$10,000,000. The project is expected to generate before-tax cash
flows of $2,500,000 forever. FSB Ltd is currently operating at its
target debt-to-equity ratio of 0.25.
The company wishes to raise the fund for the new project by a
new issue of 20-year bonds with a yield to maturity of 9% p.a. (the
flotation costs of the new debt would be 4% of the amount raised)
and a new issue of ordinary shares priced $10 per share that will
pay $1 after one year (D1) and is expected to grow by 5%
pa forever (the flotation costs of the new share issue would be 14%
of the amount raised). The company tax rate is 30%.
You are the assistant to the finance manager and is given the
responsibility to analyse the project to determine if FSB should
accept this project or not.