Blueberry-Pi Limited has spent $3 billion on developing a new single board computer over the past 4 years. The company now has 3 mutually exclusive options: 1) The company can manufacture the single board computer itself in which case the plant will cost $5 billion. Additional working capital of $2.1 billion will be required when production commences. The expected sales and selling prices are as follows:

Year	1	2	3	4	5
Number sold (in million)	100	100	100	80	80
Selling price (4)	120	120	120	100	90

The company usually depreciates plant of this type over 5 years using the straight-line method and assumes no scrap value. Variable costs are expected to be $65 per unit and other fixed cost is 2,000 million per year. Applicable tax rate for the company is 20%. The company will accept the new product if the new product can payback within 3 years.

2) Sell the know-how to one of its major competitors for a single payment of $3.5 billion.

3) Sell the know-how for a royalty of $10 per unit.

For option 1), the company may accept the new product if the new product can payback within 3 years and it can generate sufficient profit to the company.

For option 2) and 3), the company will not manufacture the product itself.

The information about the companys current capital structure are as follows:

i. The common stock is now trading at $15.65. We have used analysts estimates to determine that the market believes our dividends will grow at 6% per year and the expected dividend next year will be $2. The number of shares outstanding is 200 million.

ii. The companys 20-year bonds that pay semi-annual coupon rate of 9% is now selling at $975. The face value of the bond is $1,000 and there are 500,000 bonds outstanding.

iii. The price companys 8% preferred share is 93% of its par value ($100). The number of shares outstanding is $10 million.

Question:

a. Compute the WACC of Blueberry Pi. (10 marks)

b. Calculate the relevant cash flow for option 1, 2 and 3. (10 marks)

c. Compute the NPV, payback period and IRR for all 3 options. (15 marks)

d. What would your final decision be? Discuss your decision in detail. (10 marks)

e. As the cost of debt is apparently lower than other sources of fund, the companys CFO, Tom, suggests that the company should use debt financing exclusively in funding this new project. Do you agree with his suggestion? Please discuss in detail according to the Modigliani and Millers theory(15 marks)