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2. (10 points total) Firms A and B are both unlevered. The shares of both companies are currently trading at $100, and both offer an annual pre-tax return of 10%. In the case of firm A, the return is entirely in the form of a dividend yield (i.e., the company pays a regular annual dividend of $10 a share). In the case of firm B, the return comes entirely as capital gain ( the shares appreciate by 10% a year). Suppose that an investor buys a share of each firm today, and plans to sell them in 10 years. Suppose that dividends and capital gains are both taxed at 30%. a. (5 points) What is the annual after-tax yield (rate of return) on firm A's share over the 10-year period? b. (5 points) What is the annual after-tax yield (rate of return) on firm B's share over the 10-year period? 3. (25 points total) The Jack & Diane (JD) Corporation is considering a new 5-year project. Since this project is very different from JD's current operations, the adjusted present value will be used to value the project. The project requires an initial investment of $750,000 in new assets, which will be depreciated straight-line to O over the project's 5-year life. These assets will be worthless in five years, i.c., they will not be resold. (Assume that the depreciation tax shields can be discounted at the project discount rate). Each year for five years, the project is expected to generate pre-tax revenues of $600,000 and to require pre-tax costs of $240,000. The entire project will be financed through a 5-year bank loan with an annual rate of 10%. The principal on the loan will be repaid in equal installments of $150,000 each (i.c., each year, the company pays $150,000 in principal, and pays the interest on the outstanding loan). It is estimated that the pre-tax costs (payable at time zero) of negotiating the loan will be 4% of the amount borrowed. The project's risk is very similar to the risk of Tommy & Gina (TG) Inc.'s assets. This firm is currently financed by 100,000 shares worth $12.50 each, and $750,000 worth of debt. The beta of TG's stock is 1.5, and the company borrows at a rate of 119%. The riskfree rate in the economy is 8%, and the expected return on the market is 18%. The current corporate tax rate is 45% (assume that it applies to both JD and TG). Ignore personal taxes. a. (8 points) What would be the appropriate discount rate for the project, if it were all-equity financed? b. (17 points) What is the adjusted present value of the project?1. (20 points total) Stiphla Inc.'s real assets are expected to generate carnings before interest and taxes (EBIT) of $102,000 at the end of every year in perpetuity. The firm is currently financed by 50,000 shares each worth $6.11 and by $130,000 worth of perpetual debt issued at a rate of 12%. The corporate tax rate is 35%. Ignore personal taxes and bankruptcy costs. a. (2 points) What is the current total firm value of Stiphla Inc.? b. (3 points) What is the current expected return on Stiphla's equity? G. (2 points) What is Stiphla's weighted average cost of capital (WACC)? d. (2 points) Show that the value of the firm can be obtained by discounting its after-tax earnings at the weighted average cost of capital. Janine Finch, the CFO of the company, has just found out that Stiphla could issue an additional $130,000 worth of perpetual debt to buy back some equity. However, because the new debt will be junior to the original debt, Stiphla will have to pay a rate of 14% on that new debt. e. (2 points) What is the value of the firm after it goes ahead with the new debt issue? f. (4 points) What is the new expected return on the firm's equity? g. (2 points) Explain why the shareholders are better off ( in terms of their total wealth). h. (3 points) What is Stiphla's new weighted average cost of capital (WACC)