M&M no tax world

[rbcc]

Hi, I have some questions about the solutions to this question

an unlevered firm has cost of equity (Ku) of 10% and expected earnings before tax (EBIT) 375000. They decide to issue $2 million of debt at a cost of 6% to finance a project. The project's ROI is 15%. There are 100000 shares outstanding. what is the share price of the firm after issuing new debt.

ok so the value of the unleveraged firm (vu) is 375000/0.10=3 750 000 which is also the value of the leveraged firm before they start the project.

the NPV for the project is 2(0.15)/0.10*-2=1million
* the solutions use the cost of unleveraged equity, why would we use that and not the wacc?

Kl= 0.10+(0.10-0.06)2 000 000/(3750000+1000000)=0.1168
* they are using 2 000 000/(3750000+1000000) for the debt to equity ratio. but wouldn't that be the weight of debt? so 8/19 would be the weight and that mean the debt to equity ratio is 8/11 right?

then p=5.55/0.1168=47.52 * same question as before why use the k=cost of equity and not the wacc?

 

[rbcc]

this is an introductory finance course. I don't have any further knowledge about the subject than whats in the book. I don't know what conclusions someone else will come up with when they read a question or what they are assume about it so its hard for me to clarify before the fact.

this is using the m&m model with the standard assumptions http://en.wikipedia.org/wiki/Modigliani–Miller_theorem. I doubt it has anything to do with any outside economic assumptions.

If there is anything wrong in my analysis it's probably because I'm interpreting something incorrectly.