Question 5 and sometimes even to areas. Seven Stars (SS) was founded in 1980 by John as a manufacturer of quality chocolate. As with most food companies established in the United Kingdom in that period, SS started as a modest manufacturer of a single product that was sold locally. Later, if successful, those firms expanded their sales efforts to regional, national, international In 2014, when William's son Alex became president of SS, the family still owned all the shares of the firm and the board of directors was made up entirely of family members. Alex hired James Wilson, the chief financial officer (CFO) of SS, in 2018 with specific instructions to improve the return on the financial resources of the firm. James's background included four years as the cash manager of a large corporation with sales in excess of 10 billion. He was a graduate of an MBA programme that is nationally known for its emphasis on financial management. This Monday morning, Alex called James in his office to tell him that he was considering the purchase of Treehouse Foods, a pasta producer with annual sales in excess of 800 million, for 400 million. The book value-based capital structure of SS is Debt=29%, Equity=71%, which market value based capital structure is Debt=9%, Equity=91%. Before a decision could be made, Alex wanted the answers to three financial questions from James. First, what was the expected return from this proposed purchase? Second, what was Seven Stars' cost of capital? Finally, what was James's recommendation on how the purchase could be financed? To help Alex answer you need to explain him the answers of the following questions: (1) If SS uses book value rather than market value to determine its capital structure, what will be the impact of cost of capital on its capital budgeting decisions? (2) Why using the book value or the market value of the firm's capital in the determination of the cost of capital is considered superior? Total: 40 marks