Meryem Inc. is an all equity firm with a beta of 1.05. The return to market portfolio is 10% and the risk free rate is 4%. The company distributes all its earnings as dividends at the end of each year. Annual earnings before interest and taxes are expected to be $200,000 and will be unchanged in perpetuity. Tax rate is 30 percent.

- What is the value of the firm?

- If Meryem Inc. issues $200,000 debt at an interest rate of 4% and uses the proceeds to repurchase common stock, what is the new value of the firm? Whats the required rate of return on equity & WACC?

- Project A requires an initial investment of $270,000 and will be depreciated straight line to zero over its ten-year tax life. The investment will have a market salvage value of zero at the end of the tenth year. The project is estimated to generate $240,000 in annual sales with annual costs of $96,000. Net working capital will increase from $50,000 to $100,000 immediately and will return to $50,000 in year 9. The project will use the facility of the firm which has a market value of $150,000. The property will preserve its value till the end of the project. Based on (b), if Meryem Inc. undertakes the project, what is the new firm value?

Project B has a unique IRR of 10%. Based on (b), would you undertake Project B? Why? Why not?