Question 2 (25 points) Barona Corp. is considering five projects in five different industries. The firm will use industry average betas to evaluate the projects. The table below shows the initial capital (Io) or investment outlay of each project in $M, the annual free cash flows, (FCF) in $M, economic life, N, in years, the average industry beta (Beta), the average industry capital structure defined by debt-to-equity (D:E) ratios (by market values) and the corresponding debt-to-equity ratio financing of each project. Page 1 of 2 Project Initial cost Annual FCF ($M) N (years) Industry beta Industry D:E ratio Project D:E ratio 240 67.40 5 1.5940 1.00 0.40 150 52.54 4 1.8864 1.50 0.90 300 185.31 2 0.6368 0.67 4.00 360 91.59 6 0.7500 0.20 0.20 150 62.99 3 1.2680 0.55 0.60 The risk-interest rate is 3% while the expected market return is 10%. Assume a corporate tax rate of 25%. Irrespective of the project's risk, the firm's cost of debt (before tax) is 6%. Required: (i) Assume the projects are independent and the firm does not have capital constraint (it can undertake all projects). Rank the projects in order of their viability using the alpha value. Show all your computations. (10 points). (ii) Assume the projects are mutually exclusive. Rank them in order of their viability. Which project (s) would you undertake? (15 points) ABCDE