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THE FINANCING DECISION
Financing decision
Solution:
Current value of the firm 18 000 000 (10 000 000 + 8 000 000)
New investment 4 000 000
Firm value after investment 22 000 000
In this instance a decision to use debt would be acceptable, as the
company would be in a temporary position of disequilibrium, which can be
rectified the next time it requires finance. Issue costs are normally too
high to split R3m debt and R1m equity.
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