Moiz is the CEO of Abdullah Video Stores (AVS) . The company has 10 million shares of common stock outstanding and 160,000 7 percent annual bonds outstanding, par value PKR1,000 each. The common stock currently is selling on Pakistan Stock Exchange at PKR 34 per share. Muhad one of the financial analyst has been tasked to figure out an investment opportunity for the company which Zahra Ventures has proposed.

The proposal from Zahra Ventures is to expand into a movie channel business which will cost PKR 200 million to setup and has net positive cashflows (after-tax) from year 1 to 5 of PKR 60 million, PKR 65 million, PKR 45 million, PKR 50 million and PKR 55 million.

Muhad has started work on collecting data, and calculated the following details about AVS. The beta of AVS stock is 1.30, and the bonds have 5 years to maturity and are currently selling at par. The market risk premium is 5 percent, T-bills are yielding 5 percent, and current tax rate is 35 percent. Muhad has asked you to help him make the presentation to Moiz, and presented you the following questions.

1. What is the AVS cost of Equity right now? (2 marks)

2. What is the AVS cost of debt right now? (2 marks)

3. What are the weights of equity and debt in AVS? (3 marks)

4. What is AVS Weighted Average Cost of Capital right now? (3 marks)

5. Is the proposal from Zahra Venture financially viable? How much money would it make? (4 marks)

6. Muhad also highlights that they would have to raise the required 200 million and keep their D/E ratio same as current. Also raising this amount would require a flotation cost of 8% for equity, and 5.5% for debt.

a. What amount of equity do they need to raise? (2 marks)

b. What amount of debt do they need to raise? (2 marks)

c. What is the total flotation cost in PKR for raising capital? (2 marks)

d. What are the total yearly cashflows of the project for AVS? (2 marks)

e. Is the project financially viable? (3 marks)