Date	SP Adj Close
8/1/2014	2003.369995
9/1/2014	1972.290039
10/1/2014	2018.050049
11/1/2014	2067.560059
12/1/2014	2058.899902
1/1/2015	1994.98999
2/1/2015	2104.5
3/1/2015	2067.889893
4/1/2015	2085.51001
5/1/2015	2107.389893
6/1/2015	2063.110107
7/1/2015	2103.840088
8/1/2015	1972.180054
9/1/2015	1920.030029
10/1/2015	2079.360107
11/1/2015	2080.409912
12/1/2015	2043.939941
1/1/2016	1940.23999
2/1/2016	1932.22998
3/1/2016	2059.73999
4/1/2016	2065.300049
5/1/2016	2096.949951
6/1/2016	2098.860107
7/1/2016	2173.600098
8/1/2016	2170.949951
9/1/2016	2168.27002
10/1/2016	2126.149902
11/1/2016	2198.810059
12/1/2016	2238.830078
1/1/2017	2278.870117
2/1/2017	2363.639893
3/1/2017	2362.719971
4/1/2017	2384.199951
5/1/2017	2411.800049
6/1/2017	2423.409912
7/1/2017	2470.300049
8/1/2017	2471.649902
9/1/2017	2519.360107
10/1/2017	2575.26001
11/1/2017	2584.840088
12/1/2017	2673.610107
1/1/2018	2823.810059
2/1/2018	2713.830078
3/1/2018	2640.870117
4/1/2018	2648.050049
5/1/2018	2705.27002
6/1/2018	2718.370117
7/1/2018	2816.290039
8/1/2018	2901.52002
9/1/2018	2913.97998
10/1/2018	2711.73999
11/1/2018	2760.169922
12/1/2018	2506.850098
1/1/2019	2704.100098
2/1/2019	2784.48999
3/1/2019	2834.399902
4/1/2019	2945.830078
5/1/2019	2752.060059
6/1/2019	2941.76001
7/1/2019	2980.379883
8/1/2019	2926.459961

Please READ the question CAREFULLY and answer ALL PARTS of the question CORRECTLY. Please DOUBLE CHECK your work BEFORE posting the solution. Any WRONG OR MISSING answers will be DOWNVOTED. The S&P 500 prices are given in the table above. Thank you!

You are an original owner of a publicly traded food service company named Smith's Foods (SF). Your company has been in the high-end restaurant business (HE) for the past ten years. You announced today that the company will be issuing debt today to open a new fast food division (FF). Opening this new division costs $10M today, which you will fund by issuing debt. Revenues from this new division are expected to be $3.5M next year and are projected to grow by 4 percent per year. Costs from this new division are expected to be $2M next year and are projected to grow by 2 percent per year. The life of this project is 15 years. Analyses of other fast food businesses suggest that the beta of a typical fast food division equals 0.70 . Assume that the revenues and costs have similar risk. Throughout this problem, assume a risk-free rate of 3 percent and a market risk premium of 6 percent. a) What is the NPV of this new investment? Is the investment worthwhile? (Hint: you will need to use the growing annuity formula twice: once for revenues and once for costs.) A regression of monthly SF excess stock returns on monthly S\&P 500 excess returns from the past ten years tells you that the beta of the high-end division equals 1.5. Directly before the investment in the fast food division, SF was an all-equity firm with 1M shares outstanding trading at $25 per share. This represents the value of the high-end division. Assume that the announcement of the new division does not affect the value or beta of the high-end division. b) What is the beta of the firm after the announcement of the new division? The beta of a firm can be calculated as the value-weighted average of the division betas: firm=VD1+VD2VD1D1+VD1+VD2VD2D2 where the value of the new division equals the present value of its future net cash flows (when calculating the value of the fast food division, do not subtract the initial \$10M cost, as this was paid for using newly-issued debt). c) Assume that the beta of the new debt (valued at $10M ) equals 0.1 . What is the beta of the firm's equity after the announcement of the new division? d) The beta of your firm's equity was originally 1.5. There are two reasons why the announcement caused the beta of your firm's equity to slightly change - one reason caused the original beta to decrease while the other caused it to increase. Briefly explain these reasons