1. Justins Distillery is considering a new project. The company currently has a target debtequity ratio of 0.4, but the industry target debtequity ratio is 0.25. The industry average beta is 1.22. The market return is 10%, and the (systematic) risk-free rate is 3.5%. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 30 percent. The project will be financed at Justins target debtequity ratio. The project requires an initial outlay of $1,100,000 and is expected to result in a $75,000 cash inflow at the end of the first year. Annual cash flows from the project will grow at a constant rate of 8% until the end of the eighth year before leveling off at that same annual level (no longer growing) forever thereafter.

1. Using the WACC methodology, value this project and tell whether it should be pursued. (Hint: show all your steps along the wayyou can either do this through using MMII with taxes or by unlevering the industry beta and relevering it for the company. Be sure to show your calculated WACC for the company).
2. Show how that valuation changes if Justins uses more debt (for example, a target debt-equity ratio of 1.5) and explain whether it changes your recommendation or not. Explain why this shift in capital structure changes the value of the project.