dDrange, Inc. is currently a market leader in biomedical test equipment, but the rm's future has never been more uncertain, as it is contemplating two projects that fall into the l"uneharter'ed waters\" category. The CED, Tim Jobless, 1who also owns 30.1% ofthe rm's 1 million outstanding shares, often disagrees with the rest ofthe shareholders. The first project under evaluation is production ofthe ePhone, a smartphone that is more smart than phone. Its marketing department has engaged Ripo'Consults Ltd, a marketing research rm, that estimates ePhone annual unit sales to be 20,001] at the planned price point of $59G per phone over the next ten years, after which ckle consumers are likely to move on to the next big thing. l[Itrange Inc's operations managers estimate variable costs to be $2139 per phone, and annual xed costs to be $1 million. Initial investment in xed assets and net working capital are $2.5 million and $500,000 respectively. The xed assets are expected to be worthless by the end of the project and the net working capital investment non-recoverable. Tim Joblessl pet project under consideration, however, is his selfproclaimed revolutionary eSIate, 1which is basically t'our ePhones in a sleek exteriorminus the phone. As a gesture of goodwill, Ripo' Consults Ltd estimates at \"no additional charge" the annual unit sales ofthe eSlate to be E,U| units at the target price ot'litil per unit over the next ve years. Variable costs are expected to be $300 per unit, and annual xed costs $j,. Net capital spending and changes in net working capital for this tablet project are exactly the same as those for the ePhone project and xed assets will be depreciated on a straightline basis to zero book value over the respective projects" lives. Despite having completed its end of the deal, Ripoff Eonsults Ltd allows lGrange, Inc. to delay for ve years' payment oftheir consulting fee of$3ll,l][t. Undertaking the estate project will result in a 20 percent reduction ofePhone sales {i.e., some prospective customers ofthe e'Phone are likely to use the smartphone as everything but a phone) whereas undertaking the ePhone project will not result in cannibaliaation of eS-late sales. Should both projects be undertaken, this will result in annual xed cost economies of 53 00,000. Grange, Inc. is currently an allequity firm but plans to raise debt in the near future to achieve their desired debtequity ratio of 1.0. Grange, lnc.'s beta is 2.0, while unlevered Cherry, Inc, a likely competitor that specializes only in smartp hones and tablet has a beta of 1.5. The expected market portfolio return is 13%, and the risktree return is 5%. The marginal corporate tax rate is 30%. Assume that Grange, Inc. can borrow at the riskfree return and that financial distress is costless. For the coming year, the annual dividend by Grange, Inc. will be 20% ot' the yearly EFFA attributable to the projectls], it undertaken. Tim Jobless is planning to increase the dividend payout to 30%. for the coming year, but dissenting shareholders are satisfied with the current dividend policy and propose that Time Jobless relies on "homemade dividends" instead. Analysts expect Grange, Inc.'s target stock price to be $20 in a year.