Question 4 ABC Company owns a department store selling clothes and fashion accessories. It is thinking of expanding its business by opening a new store

Question 4 ABC Company owns a department store selling clothes and fashion accessories. It is thinking of expanding its business by opening a new store. ABC intends to run the store for only 3 years. The details relating to the project are as follows: Renovation costs of new store is $60,000. This amount will be paid by the landlord who will adjust the rent to reflect this cost. No additional working capital is required. Sales of the new store for the 3 years are $260,000, $280,000 and $300,000, respectively. Rent for the new store is $100,000each year. Variable costs are 50% of sales. Financial data pertaining to ABC are as follows: Common shares issued: 1 million shares Share price: 55 a share Bonds issued: 10,000 bonds Face value of bond: $1,000 Price of bond: $1,04452 Coupon rate of bond: 5% Maturity of bond: 5 years Information obtained from the Bloomberg terminal: ABC's beta 1.2 times of market beta 10-year Treasury bond yield 3% 5-year AA bond yield-3.5% 5-year A bonds have a spread of 0.5% above AA bond yiclds Expected return of the stock market 9% . Corporate tax rate 20% Calculate ABC's cost of equity, cost of debt as well as the weighted average cost of capital. (a) (15 marks)- Calculate the operating cash flows related to the project. (b) (5 marks) Calculate cash flows from assets for the project. (c) (3 marks) Calculate the NPV of the project using a discount rate of 8 %. Should the firm go ahead with the project? (d) (3 marks) Identify the issue and discuss why IRR cannot be used to evaluate this project. (4 marks) (e) Question 4 ABC Company owns a department store selling clothes and fashion accessories. It is thinking of expanding its business by opening a new store. ABC intends to run the store for only 3 years. The details relating to the project are as follows: Renovation costs of new store is $60,000. This amount will be paid by the landlord who will adjust the rent to reflect this cost. No additional working capital is required. Sales of the new store for the 3 years are $260,000, $280,000 and $300,000, respectively. Rent for the new store is $100,000each year. Variable costs are 50% of sales. Financial data pertaining to ABC are as follows: Common shares issued: 1 million shares Share price: 55 a share Bonds issued: 10,000 bonds Face value of bond: $1,000 Price of bond: $1,04452 Coupon rate of bond: 5% Maturity of bond: 5 years Information obtained from the Bloomberg terminal: ABC's beta 1.2 times of market beta 10-year Treasury bond yield 3% 5-year AA bond yield-3.5% 5-year A bonds have a spread of 0.5% above AA bond yiclds Expected return of the stock market 9% . Corporate tax rate 20% Calculate ABC's cost of equity, cost of debt as well as the weighted average cost of capital. (a) (15 marks)- Calculate the operating cash flows related to the project. (b) (5 marks) Calculate cash flows from assets for the project. (c) (3 marks) Calculate the NPV of the project using a discount rate of 8 %. Should the firm go ahead with the project? (d) (3 marks) Identify the issue and discuss why IRR cannot be used to evaluate this project. (4 marks) (e)