(1)You are thinking of starting a new project. You do a cash-flow analysis and estimate that the project will give you a free cash flow of $50M in one year and the free cash flows will grow at a rate of 2% per year perpetually.

The equity beta for a firm similar to your proposed project is 1.4. This similar firm has $300M of risk-free debt outstanding and has 300 million shares, each valued at $5 each. It also has a target leverage ratio (fixed D/V) policy.

Your firm has a target debt-to-equity ratio of 0.5 and your debt is risk free. Assume that the risk-free rate is 6%, that the market risk premium is 8.4% and that the corporate tax rate is 34%.

Determine how much your project is worth using the WACC approach.

(2)True or False: For a US firm financed by both debt and equity, the before-tax cost of debt is the same as the after-tax cost of debt for firms making zero taxable income. Briefly explain for your answer.