Question 1 (a) Describe and explain what agency costs of leverage are? What are the possible methods to reduce these costs? (6 marks) (b) Long Foot Ltd. is considering a project with the following net cash flows: Year Cash Flow ($ Million) 0 -700 1 100 2 200 3 300 4 200 5 150 The company's market value of equity is $1,200 million, while its market value of debt is $800 million. Long Foot maintains a constant debt-equity ratio. The equity cost of capital (rE) is 10% and the debt cost of capital (rD) is 6%. The company pays 40% tax on its income. i. What is the levered value of this project? (6 marks) ii. What is the present value of the tax shield? Question 1 (a) Describe and explain what agency costs of leverage are? What are the possible methods to reduce these costs? (6 marks) (b) Long Foot Ltd. is considering a project with the following net cash flows: Year Cash Flow ($ Million) 0 -700 1 100 2 200 3 300 4 200 5 150 The company's market value of equity is $1,200 million, while its market value of debt is $800 million. Long Foot maintains a constant debt-equity ratio. The equity cost of capital (rE) is 10% and the debt cost of capital (rD) is 6%. The company pays 40% tax on its income. i. What is the levered value of this project? (6 marks) ii. What is the present value of the tax shield