Questien 17 Consider tho francial frme. College Financial and Kensington Enterp markets hold. Colleoe financiar = cost of equity is 12 Enterprisen' cost of debt is ath 1. What is Keneington Enterprises' cost of equify? What is its weighted average cost of capitar? a. Each is considering standalone projects with projected cash flows given below. Each project has risk similar to the firms' existing projects. Compute the intemal rate of return (IRR) of each project. Should College Financial accept its project? Should Kensington Enterprises? Explain. (7 marks) (b) Now suppose there is a single market friction - bankruptcy costs - and Kensington Enterprises' probability of bankruptcy is positive. Suppose College Financial has considered a project, and is indifferent between accepting it and rejecting it according to the net present value rule. If Kensington Enterprises were offered the same project, should it accept or reject it? Explain. (5 marks) (a) To what extent do you agree with the following argument? Explain. 'Bankruptcy costs only affect the payoffs of a firm's creditors when it defaults. As a result, a firm's, shareholders do not need to factor these costs in when considering whether to undertake an investment or not.' (8 marks) Questien 17 Consider tho francial frme. College Financial and Kensington Enterp markets hold. Colleoe financiar = cost of equity is 12 Enterprisen' cost of debt is ath 1. What is Keneington Enterprises' cost of equify? What is its weighted average cost of capitar? a. Each is considering standalone projects with projected cash flows given below. Each project has risk similar to the firms' existing projects. Compute the intemal rate of return (IRR) of each project. Should College Financial accept its project? Should Kensington Enterprises? Explain. (7 marks) (b) Now suppose there is a single market friction - bankruptcy costs - and Kensington Enterprises' probability of bankruptcy is positive. Suppose College Financial has considered a project, and is indifferent between accepting it and rejecting it according to the net present value rule. If Kensington Enterprises were offered the same project, should it accept or reject it? Explain. (5 marks) (a) To what extent do you agree with the following argument? Explain. 'Bankruptcy costs only affect the payoffs of a firm's creditors when it defaults. As a result, a firm's, shareholders do not need to factor these costs in when considering whether to undertake an investment or not.' (8 marks)