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3. Suppose a company plans to add a new investment to its portfolio. To do so, the firm can either purchase company X or company Y. The project should be applied in accordance to the capital structure of the target company. Use the information below to decide upon the company to be acquired. Company X Beta 2.3 Market value of debt $2,500,000 Market value of equity $6,150,000 Initial Investment needed to $4,000,000 acquire the company Corporate tax rate = 25% The return on long-term government bonds, Rd = 4.6% The return on market portfolio, Rm = 11% The risk free rate of return Rf = 2.5% Company Y 1.2 $4,200,000 $3,500,000 $5,000,000 Company X Company Y Cash flow projected from the target company per year Year 1 Year 2 Year 3 $2,000,000 $2,000,000 $2,000,000 $4,500,000 $1,000,000 $3,000,000