Question 4 (20 marks) Part 4A (10 marks) Julia Club owns three identical bookstores. Each store has a debt-equity ratio of 40 percent and makes interest payments of USD29,500 at the end of each year. The cost of the firms' levered equity is 19 percent. Each bookstore estimates that annual sales will be USD1 million; annual cost of goods sold will be USD450,000; and annual general and administrative costs will be USD325,000. These cash flows are expected to remain the same forever. The corporate tax rate is 30 percent. 1) Use the FTE approach to determine the value of the company's equity. (7 marks) 2) What is the total value of the company? (3 marks) Part 4B (10 marks) Kowloon Inc. has produced energy-efficient bulbs for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 17 percent. Kowloon Inc. is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows, Cash flows Year -USD 24,000,000 0 8,000,000 1 13,000,000 2. 10,000,000 3 The company has arranged an USD 12 million debt issue to partially finance the expansion Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year (i.e. cost of debt is 9%) The company would also make year-end principal payments of USD 4 million per year, completely retiring the issue by the end of third year. Use APV method to determine if the company should proceed with the expansion