$1.$ Nova Inc. is evaluating a project with a total initial cost of $$8,000,000.$ The project will not

change the average risk of the firm. Nova Inc. has a tax rate of $40\%.$ You, as the financial

manager, have gathered the following data.

The Project

Annual cash flow income of $$1,150,000$ with a $10$ year life span with no salvage value.

Market:

Average annual return on the TSX $12\%,$ T$-$bills $4\%$ annualized return, Nova has a Beta of $1\mathrm{.}1875$

Debt:

The firm has $$1,000$ par value, $6\%$ coupon rate, $15$ year bonds outstanding on which semi$-$annual

interest payments are made. The bonds are quoted at $101\mathrm{.}5.$ New bonds could be issued at par

however the firm expects flotation costs of $3\mathrm{.}5\%.$

Preferred Shares:

The firm has $$50$ par value preferred shares with an $8$ percent annual dividend issued and

outstanding in the market and the shares are traded at $$45\mathrm{.}00.$ The cost of issuing and selling the

new preferred shares is expected to be $$7\mathrm{.}50$ per share, and the new preferred shares are expected

to be issued at a par value of $$75$ per share.

Common Shares:

The firm$$s common shares currently have a market price of $$80$ per share. The most recent

dividend paid by the common shares was $$5\mathrm{.}66$ per share. The firm$$s dividends have been

growing at an annual rate of $6\%,$ and this rate is expected to continue in the future. Issuing costs

for new equity are expected to be $7\%.$

The firm has the following target capital structure:

Debt $60\%$

Preferred Equity $10\%$

Common Equity $30\%$

a$.$ Calculate the cost of debt using YTM approximation. $(3$ points$)$

b$.$ Calculate the required rate of return for preferred shares. $(2$ points$)$

c$.$ Calculate the required rate of return for common shares using the dividend discount models

$($DDM$).(3$ points$)$

d$.$ Calculate the required rate of return for common shares using the CAPM model. $(3$ points$)$

e$.$ Calculate the WACC of the new project if the firm wants to maintain the target capital

structure of the firm. $(4$ points$)$

f$.$ Calculate the NPV of the project if floatation costs are considered. How will your decision

differ if the floatation costs are not considered? $(8$ points