KST Ltd manufactures running gear for athletes. The returns of KST Ltd shares have a covariance with the market portfolio of 0.02. The standard deviation of the market portfolios return is 12.5 percent, the market risk premium is 8.2 percent, and the riskfree rate of return is 8 percent. KST Ltd has $23 million of 13 percent bonds on issue which currently have a market yield to maturity of 12 percent. The market value of the bonds is $24 million. KST Ltd has 16 million shares outstanding which are currently trading at $3.00 per share. The companys marginal tax rate is 30 percent and management considers KST Ltds level of financial leverage to be optimal for its current operations. ]

a) Calculate KST Ltds after-tax weighted average cost of capital. Show all calculations.

b) For this part assume the after-tax weighted average cost of capital is 16 percent. KST Ltd has to decide whether to purchase new capital equipment. The equipment will cost $18 million, and a further $2 million to install. To date, the company has spent $400,000 on research and development related to this investment decision. The equipment is expected to generate additional net after-tax cash flows of $6.2 million a year for the next five years. Based on the information given, calculate the net present value of this project. Show all calculations.

c) What difference would it make to your answer in part 2.2 if the new equipment is to be used to manufacture ventilators? Provide a brief explanation (no calculations needed).