Alice plc has a WACC of 16%. It is financed partly by equity (cost 18% per annum) and partly by debt capital (cost 10% per annum). The company is considering a new project which would cost $5,000,000 and would yield annual profits of $850,000 before interest charges. It would be financed by a loan at 10%. As a consequence, the cost of equity would rise to 20%. The company pays out all its profits in dividends, which are currently $2,250,000 a year. You may assume that Alice plc has a traditional view of WACC and gearing. Required: (i) Calculate the effect on the value of equity of undertaking the project. (10 marks) (ii) Consider the extent to which the increase or decrease in equity value may be analysed into two causes: (a) the net present value of the project at the current WACC (5 marks) (b) the effect of the method of financing (5 marks) (iii) Explain the Miller and Modigliani I and II approaches to capital structure