Dewey, Cheatem, and Howe, a leading publisher of finance textbooks, currently has the following capital structure.

market value ofdebt=375,000

face value ofdebt=500,000

market value ofequity=625,000

beta ofdebt=0

beta ofequity=1.6

Suppose the firm is considering a new edition of its Principles of Corporate Finance textbook. The following are expected marginal cash flows:

PeriodExpected cash flows

0100,000

1+100,000

2+200,000

Assume that the firm can borrow 100,000 to finance the project at competitive terms, which involves promising to repay 120,000 in year two, with no intermediate interest payments. Assume no taxes.

Other information:

expected market return = 13%/year

riskless rate of interest =3%/year

correlation between new project cash flows and company's other projects = 1

(A)What is the firm's cost of capital before the project? After the project? (3 pts)

(B)What is the market value before the project is taken?After? (5 pts)