(c) Assume the market return is 5% and risk-free rate is 0.1%, (i) Which stock has a higher market risk? Why? (ii) Calculate security market line. Firm XYZ is planning on opening a new factory. The initial cost to build the factory is $3.5 billion, the factory will last 7 years and will have a salvage value of $1.5 bilion. It plans to use straight line depreciation and depreciate the factory toward a book value of $0.8 billion. Sales from the factory are expected to be $5 billion each year for the next 7 years and costs (other than depreciation) are 40% of revenues. Sunk costs are 30% of revenues. If Firm XYZ doesn't open the factory, it could extend Firm XYZ the current business and make $500 million every year. Additional capital expenditure is $300 million will be required at the end of each of the next 7 years. Inventories and A/P will immediately rise by $900 million and $400 million respectively and remain at these levels until returning to back to original levels at the end of the project ( t=7). A/R will rise by $600 million after the first year (i.e., t=1 ) and remain at that level until falling back from to original level at the end of the project's life (i.e., t=7). Assume the firm's marginal tax rate is 40% and WACC is 7.17\% Does the firm want to open this factory? What is IRR of this project? (c) Assume the market return is 5% and risk-free rate is 0.1%, (i) Which stock has a higher market risk? Why? (ii) Calculate security market line. Firm XYZ is planning on opening a new factory. The initial cost to build the factory is $3.5 billion, the factory will last 7 years and will have a salvage value of $1.5 bilion. It plans to use straight line depreciation and depreciate the factory toward a book value of $0.8 billion. Sales from the factory are expected to be $5 billion each year for the next 7 years and costs (other than depreciation) are 40% of revenues. Sunk costs are 30% of revenues. If Firm XYZ doesn't open the factory, it could extend Firm XYZ the current business and make $500 million every year. Additional capital expenditure is $300 million will be required at the end of each of the next 7 years. Inventories and A/P will immediately rise by $900 million and $400 million respectively and remain at these levels until returning to back to original levels at the end of the project ( t=7). A/R will rise by $600 million after the first year (i.e., t=1 ) and remain at that level until falling back from to original level at the end of the project's life (i.e., t=7). Assume the firm's marginal tax rate is 40% and WACC is 7.17\% Does the firm want to open this factory? What is IRR of this project