Question 2 Delcron plc issued debentures two years ago. Currently, the debentures are valued at 2.5 million with a yield of 6 percent per annum. Its shares are listed on the London Stock Exchange with a market capitalization of 6 million. Analysts estimate the equity beta to be at 2.17. The tax rate is 25 percent. The firm plans to invest in either project P or Q, which will not change the risk profile of the firm. The two projects' cashflows are estimated as follows: Project Year 2 Year 3 Year 4 P Q Today Outflow 200,000 Outflow 150,000 Year 1 Inflow 10,000 Inflow 70,000 Inflow 40,000 Inflow 60,000 Inflow 140,000 Inflow 100,000 Inflow 70,000 Inflow 80,000 The FTSE 350 Index is expected to earn a return of 15 percent per annum. The UK T-bill rate is at 5 percent per annum. Required: (a) Calculate the cost of equity and the after-tax weighted average cost of (10 marks) capital of Delcron plc. (b) Which project should Delcron plc accept using the net present value rule? (12 marks) (c) Assume that Delcron plc has yet to issue the debentures, with the same equity beta as above. Which project should be accepted using the net present value rule? (12 marks) (d) Assume that the general inflation rate has risen by 30 percentage points. Discuss the impact on the cost of equity, the after-tax weighted average cost of capital and on project selection. No calculations are required here. (16 marks)