Question 32 (2 points) Peter Pepper, owner of Pepper's Plastic Products Inc. (PPP), is pursuing a government contract to produce a specialty space-age plastic for use in the International Space Station. PPP has already invested $2.5 million dollars into research and development connected with the design and production of new space- age plastics and is how considered a leader in the field. The contract will last 4 years. If the land the government contract, PPP will have to invest an additional $1,800,000 in production equipment, but expects to be able to sell it to a competitor after the four years for $350,000. This new machinery will be placed in 35% CCA class. PPP owns a great deal of equipment and that particular CCA pool has a $1,000,000 per year for each of the four years of the project. Assume PPP's corporate tax rate is 40%, the risk free rate is 7%, the expected return on the market portfolio is 15%, and the CAPM is true. PPP is currently financed with $400 million of debt in the form of bonds and $600 million of equity. Each bond has a $1000 face value, a current market value of $981.28, 22 years to maturity and carries a coupon rate of 8% with coupons paid semi-annually. PPP's equity beta is 1.2. Calculate the cost of equity of PPP expressed as a percentage with up to 4 decimal places. MacBook Pro G Search or type URL Question is 12 points) Duffy was just hired as CEO of Dog Food Inc. (DFI), which has no debt on its balance sheet. He also forecasts that the firm is expected to pay $200 million/year in taxes and is expected to have a constant 20% tax rate Assuming no bankruptey costs, but personal taxes of 30% on income from equity and 50% on income from interest, if Duffy were to issue $125 million in perpetual debt at 8%, what is the present value of the tax shield? -$14 mil -$9 mil -$15 mil -$12 mil -$13 mil Next Page Page 13 of 33 MacBook Pro