Question:

Tim Hortonsis considering a project to make jumbo jets. Should Tims undertakethe project? The following data may be useful.

- Tims has a target D/E of 0.6. Tims current beta is 1.1.

- Boeing has a D/E of 1.2 and a beta of 2.1.

- Assume the risk free rate is 4% and the market risk premium is 6%.

- The project will cost $1 billion, and will generate EBITDAof $175 million.

- Assume the entire project cost will consist ofassets which will be eligible for CCA with aCCA rate of 20%. Assume the project will run indefinitely.

- Tims planning to finance this project at the same D/E level thatthe company currentlyenjoys, and assume that Tims can borrow at 4.5%. Boeings borrowing rate is 7%.

- All firms pay tax at a rate of 25%