Stella Rose. Inc. is facing a new investment opportunity that has a similar business risk as its current operation. The project will require $12 million initial investment and is expected to generate volatile cash flow during the first three years. The estimated after tax cash flow during year 1 through 3 is given below. From year 4 the after tax cash flow is expected to grow at a constant growth rate of 2% per year. The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6 the market value of equity of the company is 4.8 billion and the equity beta is 1.75. The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost. The under written charges of 1.5% of the debt issue as their total commission. The company plans to gradually reduce borrowing in the first 3 years and then return to its previous stable capital structure. Debt repayment schedule is given below. Assume the corporate tax rate is 21%. Suppose the risk free rate is 2% and the market risk return is 10%

cash flows Forecast in $M 0 1 2 3

After tax free CF -12.0 2.0 3.0 3.7

Debt Balance at year end (in$ M) 10.0 9.0 8.5 6.5

a. what is the unlevered beta of the company and the return n assets?

b. Calculate the levered cost of capital(ROE) and after-tax WACC for periods with stable capital structure.

c. What is the base case APV?

d. What is the present value of interest tax shield for the first 3 years?

e. Calculate the APV of this project with financing cost incorporated.