answer in excel format

You have the following initial information on Financeur Co. on which to base your calculations and discussion for question 2)

Current long-term and target debt-equity ratio (D:E) = 1:3

Corporate tax rate (TC) = 30%

Expected Inflation = 1.55%

Equity beta (E) = 1.6325

Debt beta (D) = 0.203

Expected market premium (rM rF) = 6.00%

Risk-free rate (rF) =2.05%

2) Assume now a firm that is an existing customer of Financeur Co. is considering a buyout of Financeur Co. to allow them to integrate production activities. The potential acquiring firms management has approached an investment bank for advice. The bank believes that the firm can gear Financeur Co. to a higher level, given that its existing management has been highly conservative in its use of debt. It also notes that the customers firm has the same cost of debt as that of Financeur Co. Thus, it has suggested use of a target debtequity ratio of 2:3 when undertaking valuation calculations.

a) What would the required rate of return for Financeur Co.s equity become if the proposed gearing structure were adopted following acquisition by the customer? (5 marks)

b)Would the above project described in 1) be viable for the new owner of Financeur Co.? Justify your answer (numerically).

1) The CEO of Financeur Co., for which you are CFO, has requested that you evaluate a potential investment in a new project. The proposed project requires an initial outlay of $7.25 billion. Once completed (1 year from initial outlay) it will provide a real net cash flow of $556 million in perpetuity following its completion. It has the same business risk as Financeur Co.s existing activities and will be funded using the firms current target D:E ratio.

a) What is the nominal weighted-average cost of capital (WACC) for this project?

b) As CFO, do you recommend investment in this project? Justify your answer (numerically).