The following data applies to Charlatan Limited.

Book value of debt $200m

Book value of equity $400m

Current free cash to equity (FCFE) $25.1m

Current beta 1.286

Debt interest payments per year (fixed) $18m

Debt maturity 7 years

Market yield on debt 7%

Annual growth estimate in FCFE 6%

Tax rate 30%

Inflation 0%

Risk-free rate 6%

Market risk premium 7%

Charlatan is planning to invest in a new asset that requires an outlay of $100m. The new asset has the same business risk as the firm and will be funded with $90m in debt and $10 million in equity. The new asset is expected to have a zero net present value.

The cost of debt for the firm will rise to 7.6% if the project proceeds.

Required

a) What is the weighted average cost of capital of Charlatan before the new asset is acquired?

b) What will be the weighted average cost of capital of Charlatan if the project proceeds?

c) Explain your result (comparing your answers to (a) and (b)).

d) Suppose the new project has an unlevered beta of 1.00. Discuss the likely impact on the weighted average cost of capital of Charlatan if the project proceeds (calculations are not necessary here).