Question 3 [25 marks] The Rudy-David Energy company is evaluating an investment of building a new production plant. The cost of the new plant is $450k with an estimated useful life of 15 years. The company decides to raise the equity required by issuing common stock onto the share market. The company is listed on the stock exchange with a B value equal to the volatility of the stock market. The company expects to maintain the existing capital structure at a risk-free rate of 6% and a risk premium of 7%. Issuing the stock generates a cost of funding the equity of 7%. The annual incremental after-tax cash flow is $125k. The corporate tax rate in Australia is 30%. The capital structure is such that the company has a 20% debt ratio. The cost of the debt capital is 7% whereas the cost of funding the debt raised is 3%. a) Draw the cash flow diagram representing the above investment scenario [2 marks] b) Calculate the WACC (8 marks). c) Carry out an NPV of the project [6 marks). d) Considering the true cost of funding the project determines if you would proceed with the investment. Explain your reasons for the decision [4 marks). e) [2 marks each] 1. Explain what the B value of a stock represents. 2. What is the value of the stock market? Question 3 [25 marks] The Rudy-David Energy company is evaluating an investment of building a new production plant. The cost of the new plant is $450k with an estimated useful life of 15 years. The company decides to raise the equity required by issuing common stock onto the share market. The company is listed on the stock exchange with a B value equal to the volatility of the stock market. The company expects to maintain the existing capital structure at a risk-free rate of 6% and a risk premium of 7%. Issuing the stock generates a cost of funding the equity of 7%. The annual incremental after-tax cash flow is $125k. The corporate tax rate in Australia is 30%. The capital structure is such that the company has a 20% debt ratio. The cost of the debt capital is 7% whereas the cost of funding the debt raised is 3%. a) Draw the cash flow diagram representing the above investment scenario [2 marks] b) Calculate the WACC (8 marks). c) Carry out an NPV of the project [6 marks). d) Considering the true cost of funding the project determines if you would proceed with the investment. Explain your reasons for the decision [4 marks). e) [2 marks each] 1. Explain what the B value of a stock represents. 2. What is the value of the stock market