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Financial Resources Part 2, Assignment #5 Corporate Finance, Assignment #6 Please explain concisely but clearly all of your answers. I am not expecting perfection as long as your train of thought is sound. Problem 1 (The WACC method and the APV method) Omicron Industries' market value balance sheet ($ Millions) and cost of capital Assets Liabilities Cost of capital Cash 0 Debt 200 Debt 6% Other assets 500 Equity 300 Equity 12% c 35% Omicron Industries new project's free cash flows Year 0 1 2 3 Free Cash Flows ($100) $40 $50 $60 Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt-to-equity ratio. (a) Omicron's weighted average cost of capital is closest to: (1) (2) (3) (4) 7.10% 7.50% 9.60% 8.75% (b) The NPV for Omicron's new project is closest to: (1) (2) (3) (4) $23.75 $27.50 $28.75 $25.75 (c) The Debt Capacity for Omicron's new project in year 0 is closest to: (1) (2) (3) (4) $38.75 $75.50 $50.25 $10.25 (d) The Debt Capacity for Omicron's new project in year 1 is closest to: (1) (2) (3) (4) $38.75 $48.25 $50.25 $58.00 (e) The Debt Capacity for Omicron's new project in year 2 is closest to: (1) (2) (3) (4) $55.25 $38.75 $22.00 $33.00 (f) Omicron's unlevered cost of capital is closest to: (1) (2) (3) (4) 8.75% 7.10% 9.60% 7.50% (g) The unlevered value of Omicron's new project is closest to: (1) (2) (3) (4) (h) $96 $124 $126 $25 The interest tax shield provided by Omicron's new project in year 1 is closest to: (1) (2) (3) (4) $3.00 $1.05 $50.25 $17.60 (i) Calculate the present value of the interest tax shield provided by Omicron's new project. (j) Calculate the levered value of Omicron's new project using (i) and (g) and compare it to the levered value of Omicron's new project obtain by virtue of the WACC method. Problem 2 (Astral Records) Please download the Astral case (see syllabus). Should Sarah Conner approve the packaging-machine investment in Exhibit 4? Perform the budgeting decision using the WACC method. Assume a cost of debt of 9%, a cost of levered equity of 14.6%, a marginal tax rate of 40%, and a debt-to-equity ratio of 50%. Some of you may wish to make some assumptions along the way. As long as the assumptions are coherent with Exhibit 4, it is all fair game. Perfection is not required. Just looking for a meaningful effort. Hint 1: Recall that several costs grow at rate 5% (the inflation rate). Hint 2: You may wish to start the timeline in 1993 (time 0) and end it in 2006 (time 13)