a) SeafoodCo earns a return on invested capital of 20% on its existing stores. Given intense competition for new store sites, you believe new stores will earn only their cost of capital. Consequently, you set return on new invested capital (RONIC) (8%) equal to the cost of capital (8%) in the continuing-value formula. A colleague argues that this is too conservative, as Seafood Co will create value well beyond the forecast period. What is the flaw in your colleague's argument? (5 marks) b) Irish Produce is an Irish producer of food products. Over the past year, profitability has been strong, and the share price has risen from 55 per share to 80 per share. Financial analysts (who generate projections in euros) expect the profit growth to continue. The company has 200 million shares outstanding. Its borrowing is conservative; the company has only 8,000 million in debt. The debt trades at a yield to maturity 50 basis points above Irish risk-free bonds. Irish Produce has a market beta of 0.7. If the Irish risk-free rate is 7%, the market risk premium is 5%, and the marginal tax rate is 30%, what is the cost of capital of Irish Produce? (Assume that the current capital structure is the target capital structure going forward.) (10 marks) Irish Produce is now considering a leveraged recapitalization of the company. Upon announcement, management expects the share price to rise by 10%. If the company raises 2,000 million in new debt to repurchase shares, how many shares can the company repurchase? Assuming management will actively manage to the new capital structure, estimate its new market beta. If the interest rate on the company's debt rises to 100 basis points above the Irish risk-free rate, what will its new cost of capital equal? (Assume a debt beta of zero and that the beta of the tax shields will equal the beta of the unlevered firm. In other words, BD = 0, and Tax shield = Bu.) (20 marks) D ACC= _k (1-1 ) + k WA E[R]=R+B(E[R]-R) 8. = 8 + 2/(P-P)