Let us calculate the present value of cash outflows that will take place as a result of this new debt arrangement with principle of $ 1800000 and interest of 6%. We shall discount the cash flows at market rate of 12% Total of the Present values of cash outflows = 1410684. So, we shall classify the debt as follows : Liability portion = 1410684 Equity Portion = 1800000 - 1410684 = 389316

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