The firm’s cost of equity capital is 18%, the market value of the firm’s equity is $8 million, the firm’s cost of debt capital is 9%, and the market value of debt is $ 4 million. The firm is considering a new investment with an expected rate of return of 17%. This project is 30% riskier than the firm’s average operations. The riskless rate of return is 5%; the variance of the market return is .08. Is the project profitable? [Assume a world without taxes.]
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