Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt-to-equity ratio. (a) Omicrons weighted average cost of capital is closest to: (1) 7.10% (2) 7.50% (3) 9.60% (4) 8.75%

(b) The NPV for Omicrons new project is closest to: (1) $23.75 (2) $27.50 (3) $28.75 (4) $25.75 (c) The Debt Capacity for Omicrons new project in year 0 is closest to: (1) $38.75 (2) $75.50 (3) $50.25 (4) $10.25 (d) The Debt Capacity for Omicrons new project in year 1 is closest to: (1) $38.75 (2) $48.25 (3) $50.25 (4) $58.00 (e) The Debt Capacity for Omicrons new project in year 2 is closest to: (1) $55.25 (2) $38.75 (3) $22.00 (4) $33.00 (f) Omicrons unlevered cost of capital is closest to: (1) 8.75% (2) 7.10% (3) 9.60% (4) 7.50%

(g) The unlevered value of Omicrons new project is closest to: (1) $96 (2) $124 (3) $126 (4) $25 (h) The interest tax shield provided by Omicrons new project in year 1 is closest to: (1) $3.00 (2) $1.05 (3) $50.25 (4) $17.60 (i) Calculate the present value of the interest tax shield provided by Omicrons new project. (j) Calculate the levered value of Omicrons new project using (i) and (g) and compare it to the levered value of Omicrons new project obtain by virtue of the WACC method.

Problem 1 (The WACC method and the APV method) Omicron Industries' market value balance sheet (s Millions) and cost of capital Cost of capital Liabilities Assets Cash Debt 200 6% Debt Other assets 500 300 12% Equity Equity 35% Omicron Industries new project's free cash flows 1 2 3 Year Free Cash S 100 Flows $40 $60 550