Threes Company is evaluating a new project. Mr. Jack Tripper,ChiefFinancialOfficer, has received pro forma income statements for the project from the Controller's office and wants to know whether the new project will increase shareholders' wealth.

The estimatedinitialproject cost is $25millionto undertake this six year project. The project is expected to generate the following cash flows for the next six years: $5.2million in year 1; $6.6million in year 2, $7.6million in year 3; $8.7million in year 4, $8.2million in year 5; $9.8million in year 6 including salvage value and recovery of working capital.The firm's tax rate is30%. Current market interest rate on asix-year bank loan is6%.The firm's target payback period is four years.

Threes'sfinancing policyisto actively maintain a target debtratio (D/D+E) at50% (or100% debt-to-equity ratio) during the life of the project. Mr. Jack Tripperis considering issuinga6-yearbond with 6% annual couponon the $1,000 par, payable semi-annually,for $10million.Threes uses the CAPM in estimating shareholders' opportunity cost: the risk-free rate is4.3%, the market risk premium is6.5%, and the project's beta is 1.80, respectively. Threes' current dividend yield is3% a year.

2.?(12)Compute:the WACCof the project.

3.?(5)ComputetheNPVandIRRof the project.

4.?(5)Computethe present value of tax shields of this 6 year bond.

5.?(5)A junior financial manager suggests Jack to issue six-year zero-coupon bonds with a $1,000 par. Compute the number of zero-coupon bonds that Threes should issue to finance $10millionandthe PVTS on these zero-coupon bonds.

6.?(5)Another junior manager suggests Jack to issue premium bonds with 100% coupon rate, payable semi-annually, with a $1,000 par. Compute the number of bonds that Threes should issue to finance $25million and also compute the PVTS on these 100%coupon bonds.

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