Reggie Hammond is the CEO of Cates Research $($CR$)$ who has recently identified an island off the northeastern coast of Canada that he believes contains a large population of special spiders. The venom from these spiders will be used to fight a specific type of cancer that is unique to Europe. The cancer drug will be sold exclusively in Europe. The owners of the island have offered to sell it to CR for CAD $30($Canadian dollars$)$ million. CR would also be faced with additional initial costs of CAD $10$ million to engineer the equipment that will extract the venom from the spiders. Hammond is an environmentally sensitive leader and has vowed to return the spiders to the island and to restore the island if there is any damage to it$.$

The spider population would provide enough venom to last for four years. The following information has been made available to Hammond:

Year $1$

Revenues

EUR $60\mathrm{.}8$ million $($increase by $3\mathrm{.}2\%$ annually$)$

Operating Expenses $($excluding depreciation$)$

EUR $44\mathrm{.}2$ million $($increase by $2\mathrm{.}6\%$ annually$)$

Interest Expense

EUR $2\mathrm{.}2$ million $($fixed interest payments$)$

Exchange Rate

EUR $0\mathrm{.}69/$CAD$,$ with the CAD depreciating by $2\%$ per year vs the EUR

Hammond has decided to issue a bond in Canada to raise CAD $17$ million. The bond will have a coupon rate of $6\mathrm{.}25\%,$ four years until maturity, and a price of CAD $963.$

Hammond has also decided to raise the remaining capital by issuing shares of CR using a Toronto$-$based investment banking firm. CR pays a current dividend of CAD $2\mathrm{.}75$ per share with an expected growth rate of $4\mathrm{.}2\%.$ Current market price of CR$$s stock is CAD $28\mathrm{.}25.$

The following is a list of other relevant information: CR pays a marginal corporate tax rate of $20\%$; remember that land cannot be depreciated. The current spot rate is EUR $0\mathrm{.}66/$CAD$.$ CR will donate to the European Spider Foundation at the end of year $2$ in the amount of EUR $2$ million and will construct a spider home on the island at the at end of year $4$ in the amount of EUR $3$ million. Depreciation percentages are $23\%$ in year $1,38\%$ in year $2,$ and $11\%$ in year $3.$

A$.$ Compute the WACC.

B$.$ Determine the net present value $($in terms of CAD$)$ for the island.

C$.$ Identify and discuss two operating risks associated with this investment and one political risk.

D$.$ Explain how CR will most likely manage the currency risk.