Exercise 2 (Project valuation) [30 marks] Use the following information for the question(s) below. Market Value Balance Sheet and Cost of Capital for the firm Econtainer Inc. Assets Liabilities Cost of Capital Cash 650 Debt 1050 Debt 3% Other Assets 1200 Equity 800 Equity 15% Corporate Tax: TC 50% The firm has a new project available. New project Free Cash Flows: Year 0 1 Free Cash Flows ($445) $552.5 Assume that the new project is of average risk for the firm and that the firm wants to hold constant its D/E ratio. (a) What is the unlevered cost of capital? What is the (post-tax) weighted average cost of capital? [10 marks] [SHOW YOUR WORKING] (b) Should the firm do the project? (Yes/No) How much firm increases in value thanks to the new project? [10 marks] [SHOW YOUR WORKING] (c) What is the debt capacity for the new project in year 0? [10 marks] [SHOW YOUR WORKING] Exercise 2 (Project valuation) [30 marks] Use the following information for the question(s) below. Market Value Balance Sheet and Cost of Capital for the firm Econtainer Inc. Assets Liabilities Cost of Capital Cash 650 Debt 1050 Debt 3% Other Assets 1200 Equity 800 Equity 15% Corporate Tax: TC 50% The firm has a new project available. New project Free Cash Flows: Year 0 1 Free Cash Flows ($445) $552.5 Assume that the new project is of average risk for the firm and that the firm wants to hold constant its D/E ratio. (a) What is the unlevered cost of capital? What is the (post-tax) weighted average cost of capital? [10 marks] [SHOW YOUR WORKING] (b) Should the firm do the project? (Yes/No) How much firm increases in value thanks to the new project? [10 marks] [SHOW YOUR WORKING] (c) What is the debt capacity for the new project in year 0? [10 marks] [SHOW YOUR WORKING]