The firms cost of equity capital is 18%, the market value of the firms equity is $8 million, the firms 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 firms 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.]