The companys stock is hundred percent owned by its several cofounders, and the current market price of each of the 500,000 shares of stock is $20.

When you started your work, you were immediately assigned a big project. You were asked to evaluate a new investment project: opening a new Coffee Cup location in Pomona. Specifically, you were asked to analyze the projected sales revenues and costs and advise your boss on whether the project could be profitable. Below is the information regarding the project:

Project life	6 years
Initial investment raised solely from equity	$1,206,000
Number of Coffee Cup customers, per year Out of this number, 75% are adults, and 25% are children.	100,000
Average price that an adult customer pays in year 1 This amount will be growing by $0.50 each following year	$6
Average price that a child customer pays each year	$3
Cost of preparing food and drinks and other variable costs, per each customers meal	$1
Equipment rental and other fixed costs, per year	$200,000
Systematic risk (i.e., Beta) of the project	1.17

Corporate tax rate is 34%. The project will fully depreciate on straight line over 6 years.

You also know that Coffee Cup has three main competitors in the coffee industry, also owned fully by their respective cofounders: Coffeebucks, Coffee Bean, and Petes Coffee. All but Coffeebucks are comparable in size to Coffee Cup, with Coffeebucks being roughly twice the size. Coffeebucks returns are not as prone to economy-wide up or downturns when compared to the returns on an average stock in the economy, and so its systematic risk, measured by Beta, is only 0.657. For Petes Coffee, though, the systematic risk is higher, with the Beta of 1.051, and it is even higher for Coffee Bean and equals 1.255. You did some research and figured out that the market risk of Coffee Cup reflects the average risk of the competitors.

Your boss also gave you some data that might help you in your analysis on annual returns of the US Treasury bills which are viewed as the riskless asset, as well as for the market portfolio proxied by Standard & Poors 500 index:

State of the economy (all equally likely)	Annual returns (%)
	Treasury bills	S&P 500
Boom	4	25
Normal	4	12
So-so	4	1
recession	4	-3

Question 4. How will the systematic risk of the company change if the project is accepted? For that you can use the information given earlier about the companys current capital structure, and the fact that another $1,206,000 worth of equity would be raised to cover the initial cost of the project. (Hint: you can view the company with the project as a portfolio.) Explain and show all necessary calculations.