2. You are in charge of the Finance Department at Johnnys Kawasaki, Inc. The firm is considering expanding to Europe and is planning to build a plant in London. The plant will cost approximately $14 Million. To offset the expense, you have estimated the plant will generate NCFs of $2.75 Million in each of the first four years of existence and $1.95 Million in each of the remaining four years. Your first duty is to identify the optimal capital structure with which to pay for the $14 Million dollar project. After months of work, you have identified the following data. OPTION If you have Debt of you will have

Cost of Debt Beta

1 $2 Million 6.67% .76

2 $5 Million 7.25% .81

3 $7 Million 8.19% .92

4 $10 Million 9.65% .98

In addition, the expected return on the market is 9% and the risk-free rate is 3%. Complete the following table: (10 pts)

OPTION We Wd Ke WACC

1

2

3

4

b. The optimal capital structure involves $_______________ of Debt.

c. What is the NPV of the project? Do you accept it?