AnSui plc (a clothing manufacturing company) is considering investing into a new restaurant business. You are provided with following information:

• - Cash inflows are estimated as a perpetuity of 700,000 per year.

• - Cash outflows excluding interest payments, are estimated as 70% of cash

  inflows.

• - The tax rate is 20%.

• - The company target capital structure is 40% debt and 60% equity.

• - The restaurant project requires an initial investment of 1,000,000, of which

  390,119 is debt at the cost of borrowing of 10%.

• - LenD is a company specialized in restaurant business and it is chosen to be a

  benchmark for estimating AnSui's unlevered cost of equity. LenD has a capital structure of 30% debt and 70% equity, with a tax rate of 20%. LenD's levered cost of equity and cost of debt are 22% and 8%, respectively.

  Required:

a) Estimate the restaurant project value to AnSui using the APV (Adjusted Present

Value) method.

(25 marks)

2. b) Estimate the restaurant project value using the FCFE approach. (10 marks)

3. c) Estimate the restaurant project value using the FCFF/WACC approach. (10 marks)

4. d) Outline 4 main benefits or costs of debt to be considered when using debt.

   (Word limit: 150)

   (10 marks)

5. e) AnSuis CFO is asking you to use the companys estimated cost of equity of 18% as the discount rate when evaluating the restaurant project using the FCFE method. Give critical comments and explanation on whether it would be appropriate to use the 18% as the discount rate.