4a. You are comparing two companies, Hammer Company and Nail Company. The two companies are the same in all aspects except for their capital structure. Hammer is all equity financed with a market value of stock of $1,750,000. Nail is levered with market value of debt of $750,000 and market value of stock of $1,000,000. Both companies have an EBIT (earnings before interest and taxes) of $240,000. Nail has an year-end interest expense of $72,000. Assume there are no taxes and all earnings streams are perpetuities. The two companies distribute all their earnings to stockholders immediately. Suppose you can borrow at an annual rate of 8% and have developed two investment strategies as follows:- Strategy A: buy 12% of Nail Company Strategy B: buy 12% of Hammer Company and you borrow such that the initial net costs of the two strategies are equal. i) Calculate the year-end cash flow from the investment in Hammer and Nail? Which strategy will you take? ii) Will the process continue forever? Explain. (8 marks) b. Great Infrastructure Company has recently identified a new infrastructure project that requires an investment of $25,500,000. To raise this money, the company has issued new debt and new equity and the total flotation cost is $1,750,000. Suppose the flotation cost of issuing new debt and new equity are respectively 5% and 8%. What is the target debt-equity ratio of Great Infrastructure if the company issued new debt and new equity in the same proportion as its target capital structure? (5 marks) c. Star Airline is a listed airline company in Hong Kong with flight services to major cities in United States, Europe and Asia Pacific Region. You are a financial manager of Star Airline. One day, the CFO of the company talked to you, Is it possible for our company to identify an optimal capital structure. Tell me your view and reasons. In addition, could you explain what factors we should consider if we decide to develop our company capital structure policy under the current macro situation in 2021? Besides, we want to maximize our firm value but the cost of equity financing will increase if we increase our debt according to the capital structure theories. Should we reduce our amount of debt so as to keep the cost of equity down? Respond to your CFO questions. Illustrate your answers with example(s)