#3. National Electric Company (NEC) is considering making a $20 million

modernization expansion project in the power-systems division. Tom Edison, the

company's chief financial officer, has evaluated the project; he determined that the

project's EBIT will be $12.12 million in perpetuity. NEC's cost of debt is 10 percent, and

its cost of equity is 20 percent. The firm's target debt-equity ratio is 200 percent. The

expansion project has the same risk as the existing business, and it will support the same

amount of debt. NEC is in the 34 percent tax bracket. Assume that annual depreciation

charges for the project will exactly equal annual capital expenditure charges necessary to

maintain the project. Using WACC analysis, should NEC accept the project?

#4. Suppose Rocky Shoes and Boots (RCKY) has earnings per share of $2.30 and

EBITDA of $30.7 million. RCKY also has 5.4 million shares outstanding and debt of

$125 million. You believe Deckers Outdoor Corporation is comparable to RCKY in terms

of its underlying business, but Deckers has no debt. If Deckers has a P/E of 13.3 and an

enterprise value to EBITDA multiple of 7.4, estimate the value of a share of RCKY using

both multiples. Which estimate is likely to be more accurate?