# The Link Between Capital Structure and Capital Budgeting

**Question description**

Fiera Corporation is evaluating a new project that costs $45,000. The project will be financed using 40% debt and 60% equity, thus maintaining the firm’s current debt-to-equity ratio. The firm’s stockholders have a required rate of return of 18.36%, and its bondholders expect a 10.68% rate of return. The project is expected to generate annual cash flows of $13,000 before taxes for the next two decades. Fiera Corporation is in the 36% tax bracket. Remember to show all your work.

For this case you must:

- Calculate the firm’s weighted average cost of capital (WACC).
- Calculate the traditional net present value (NPV) of the project using the WACC. Explain if the project should be undertaken.
- Use Modigliani and Miller’s Proposition II, and calculate the required return on unlevered equity.
- Use the adjusted present value (APV) method to determine whether or not the project should be undertaken and explain why.
- Use the flow-to-equity (FTE) method to determine whether or not the project should be undertaken and explain why.

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