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3. [10] NoFear Inc. has sold adventure sports clothing and equipment in Western Canada for over 25 years. Similar sports equipment retailers have an average debt-equity ratio of 1, average equity cost of capital of re =11%, and their average cost of debt is rp = 7%. (Assume that these comparable companies have maintained a constant debt-equity ratio.) No Fear and its comparables are subject to a 45% marginal corporate tax rate. NoFear is planning to expand in Eastern Canada. The expansion is expected to generate the following free cash flows: Year: 0 1 2 3 Free Cash Flow: - $60,000,000 $23,500,000 $23,500,000 $23,500,000 The company has arranged a $45 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 7.75% at the end of each year on the outstanding balance at the beginning of the year (so at time t+1, the company pays interest on the loan balance outstanding at time t). The company would also make year-end principal payments of $15 million per year, completely retiring the debt issue by the end of the third year. a. [9] What is ru? What is the APV of the expansion? Should the company proceed with the expansion? b. [1] Would the project have a positive NPV with 100% equity financing? Briefly explain why (or why not)