(Solution) - Consider a project generating a level perpetual stream of cash -(2025 Original AI-Free Solution)

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Consider a project generating a level, perpetual stream of cash flows. The project is financed at an initial debt-to-value ratio L. The debt is likewise perpetual. But the company follows Financing Rule 1: The dollar amount of debt is kept constant. Derive a formula for the adjusted discount rate r* to fit these assumptions.33 What does this formula imply for
(a) The difference between WACC and the opportunity cost of capital r and
(b) The formulas for levering and relevering the cost of equity