1. Taco Bell is evaluating a project that costs $10,000,000 in a project. The project is to be financed by drawing down 6 million of the firms cash reserves, which is earning a risk-free return of 4%, and remaining 4 million will be raised by issuing new debt, requiring 5%. The firms current income statement is the following:

EBIT

6,500,000

Interest Expense (minus)

400,000

Interest Income (add)

240,000

EBT

6,340,000

Taxes (21%)

1,331,400

Net Income

5,008,600

The firm has 2 million shares outstanding. The firm has a cost of equity of 10%, and a WACC of 8%.

The project is expected to generate 650,000 in EBIT forever, and does not have any associated depreciation expenses, or NWC needs.

A. What is the Net Present Value of the Project?

B. Calculate the EPS of the firm, the EPS of the Project, and Firm + Project EPS. What impact will it have on the EPS of the firm? Is the project accretive or dilutive?

C. What is the Economic Value Added of the project?

D. Given the information in A-C, should we accept or reject the project?

E. Using the same information in question 1, lets assume that Taco Bell funds the full 10,000,000 by issuing equity. If Taco Bells current stock price is $18.00 a share, what impact will it have on the EPS of the firm? What is the new EPS under this scenario? Is the project accretive or dilutive?