help pleasee..do not understand question. i am confused between methods

FIN 720 ASSIGNMENT I DUE DATE: OCTOBER 28 2016 INSTRUCTIONS: In groups of 4 to 8 people, attempt the questions below. Your submission must be typed and can be made online. QUESTION ONE. (a) A company which has been in operation for five years has now steadied at annual free cashflows of P280000. The company's capital structure consists of P200000 7% debt and P500000 equity at 12%. The Company is considering an expansion project which according to the 5 year plan, will increase the free cash flows to P285000 in the first year, P290,000 in the second and third years and finally to P295000 in years 4 and five. The expansion will require the following additional capital; Year 1 P50,000 debt Year 2 P50,000 debt Year 3 No additional capital Year 4 P100,000 debt Year 5 No additional capital As a result of changes in the capital structure, the cost of debt is expected to increase to 8% in year 1, 10% in year 2 and finally to 11% in year 4. The cost of equity is expected to increase to 15% in year 4. Required (i) Is the expansion project worth undertaking? (ii) [20 marks] The General Manager remarked that \"I can understand that the cost of debt is increasing in line with the perceived increase of default as our debt increases but I don't get why the cost of equity should increase\". Help the General Manager understand. [10 marks] QUESTION TWO Discuss the Dividend signalling hypothesis. [10 marks]