Community bank of Kenya must decide whether to open a new branch in Rongai. The current market value of the bank is $ 2500000. According to company policy (and industry practice) the banks capital structure is highly leveraged. The present (and optimal) ratio of debt to total asset is 0.9. Community Banks debt is almost exclusively in the form of demand savings and time deposits. The average return on these deposits to the banks client has been 5% over the past five years. However recently interest rates have climbed sharply and as a result Community Bank presently pays an average annual rate of 6% on its accounts in order to remain competitive. In addition the bank incurs a service cost of 2% per account. Because Central Bank of Kenya regulations put a ceiling on the amount of interest paid by banks on their accounts, the banking industry at large has been experiencing disintermediation (a loss of clients to the open money market) to Treasury Bills, where interest rates are higher. Largely because of the interest rate situation (which shows no sign of improving), Community banks president has stipulated that for the branch project to be acceptable its entire cost of $500000 will have to be raised by 90% debt and 10% equity. The banks cost of equity capital Ks is 11%. Community banks marginal tax rate is 30%. Market analysis indicates that the new branch may be expected to return net cash flows according to the following schedule:

Year	0	1	2	3	4	5	6 to Infinitive
$	-500000	250000	150000	135000	245000	150000	150000

1. Should community bank open a new branch? (10 Marks) kindly show your working