a) At an interest rate of 35 per cent, which of the following sequences of cash flows should you prefer? Would you choose the same sequence of cash flow with an interest rate of 1 per cent? Describe the main effects of a rising interest rate. A B D Year 1 Year 2 Year 3 500 300 100 100 300 700 300 300 300 Option A or C as they all add up to 900 [7 marks] b) ABC Corporation has developed an improved version of its most popular product. To get this improvement to the market will cost 48 million, but the project will return an additional 13.5 million for 5 years in net cash flows. The firm's debt-equity ratio is .25, the cost of equity is 13 per cent, the pretax cost of debt is 9 per cent, and the tax rate is 21 per cent. All interest is tax deductible. What is the net present value of this proposed project? Provide a definition for net present value. [7 marks) c) Company A has an aftertax cost of debt of 5.1 per cent at its current tax rate of 34 per cent. What will its aftertax cost of debt be if the tax rate drops to 21 per cent? Assume all interest is tax deductible. Explain the effect of taxes on the cost of capital. [7 marks] d) XYZ Corporation has 200 shares of common stock outstanding at a market price of 37 a share. Suppose the firm common stock has a beta of 1.37, the risk free rate is 3.4 per cent, and the market risk premium is 8.2 per cent. The firm also has 5 bonds outstanding with a face value of 1,000 per bond that are selling at 99 per cent of par. The bonds have a coupon rate of 6 per cent and a yield to maturity of 6.7 per cent. All interest is tax deductible. If the tax rate is 21 per cent, what is the weighted average cost of capital? The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of 135,000 and cash inflows of 52,000, 100,000, and 50,000 for Years 1 to 3, respectively. What is the net present value (NPV) of the project? Explain whether would you invest in this project? Show the calculations. [9 marks] End of Section A