ASB.com has a total market value of $$524$ million. The market value of equity if $$300$ million and the

company carries debt valued at $$224$ million. The before$-$tax cost of debt is $9\%$ and the cost of equity

is estimated at $$14\%.$ The tax rate is $35\%.$

a$)$ Estimate the weighted$-$average cost of capital for the company.

$(2$ marks$)$

b$)$ ASB.com is considering a project, which is expected to produce $$12\mathrm{.}5$ million in annual after$-$tax

cash flows for the next $5$ years. The project has the same risk as the company$$s existing operations

and is expected to support the same debt capacity. What is the NPV of the project if the estimated

investment required for the project is $$45$ million?

$(4$ marks$)$

c$)$ ASB.com is considering to acquire a family owned firm, Gerry Corp. Gerry Corp. regenerates an

after$-$tax cash flow of $$1\mathrm{.}5$ million a year. This is expected to continue indefinitely at this level. The

firm$$s tax is $36\%$ and the industry average data of comparable companies are as follows:

cost of debt is $12\%$; average beta for comparable companies is $1\mathrm{.}5$; risk free rate is $4\mathrm{.}5\%,$ and the

market risk premium is $9\%.$ Gerry Corp.$$s debt ratio at $40\%$ is very close to the industry average.

Show the steps of valuating Gerry Corp. and calculate its value.

$(6$ marks$)$

d$)$ If the Gerry Corp. cash flows rose by $5\%$ per year, would it affect the company's value? Explain.