Question 4 (15 marks) Zamba Limited is intending to expand its business by investing in a new patent. This new investment, costing $50 million, will result in a net after tax cash flow of $12M for the next 10 years. Due to the recent credit downgrade on the company from A to BB, the expected long term cost of debt would increase. As a result, management is uncertain if they should still proceed with the investment. A similar BB rated 10 year bond is currently selling for $908.72 per $1000 bond with a coupon rate of 9% paid semi-annually. Using the financial information below, ignoring taxes, show evidence of whether to go ahead with the investment or not. Price per share Beta of the company Book value per share Number of shares of common stock Share returns of the coy of the past four years Market return for the past four years Risk-free rate Long term debt outstanding $50 0.8 $25 10,000 10%, 30%, 20%, 20% 5%, 15%, 25%, 15% 5% $300,000 Expected rate of return on stock (reguity) 15% Question 4 (15 marks) Zamba Limited is intending to expand its business by investing in a new patent. This new investment, costing $50 million, will result in a net after tax cash flow of $12M for the next 10 years. Due to the recent credit downgrade on the company from A to BB, the expected long term cost of debt would increase. As a result, management is uncertain if they should still proceed with the investment. A similar BB rated 10 year bond is currently selling for $908.72 per $1000 bond with a coupon rate of 9% paid semi-annually. Using the financial information below, ignoring taxes, show evidence of whether to go ahead with the investment or not. Price per share Beta of the company Book value per share Number of shares of common stock Share returns of the coy of the past four years Market return for the past four years Risk-free rate Long term debt outstanding $50 0.8 $25 10,000 10%, 30%, 20%, 20% 5%, 15%, 25%, 15% 5% $300,000 Expected rate of return on stock (reguity) 15%