Question Three (25 marks) The Go Energy company is evaluating an investment of building a new production plant. The cost of the new plant is $2m. The GO Energy company decides to raise the equity required by issuing common stock onto the share market. The company is listed on the stock exchange with a value equal to the volatility of the stock market. The company expects to maintain the existing capital structure at a risk free rate of 4% and a risk premium of 7%. Issuing the stock generates a cost of funding the equity of 56. The corporate tax rate in Australia is 30%. The capital structure is such that the company has a 35% debt ratio. The cost of the debt capital is 8% whereas the cost of funding the debt raised is 46. It is estimated that the annual inflows and outflows will be as shown in figure 3a below. A. Calculate the weighted average cost of capital. [2 marks] B. Using the discount rate (WAC) from part (a) carry out an NPV of the project by using the inflows and outflows shown in Figure 3a and determine the $Y value, such that the company would make a profit of $3: after eight years of operation. [8 marks] C. Taking into account the true cost of funding the project, determine if you would proceed with the investment. (5 marks] D. 1. Explain what the B value of a stock represents. [2 marks] 2. What is the B value of the stock market? [2 marks] $800K $600k Out Flows $500K $100k $500k $500K $500K $100k 0 2 3 4 5 16 8 In Flows 1 V SY v 1 $3Y $2Y Figure 3a